The Benefits of Competitive Upward Channel Decentralization

Yunchuan Liu () and Rajeev K. Tyagi ()
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Yunchuan Liu: College of Business, University of Illinois at Urbana-Champaign, Champaign, Illinois 61820
Rajeev K. Tyagi: The Paul Merage School of Business, University of California, Irvine, Irvine, Calilfornia 92697

Management Science, 2011, vol. 57, issue 4, 741-751

Abstract: Upward channel decentralization occurs when firms choose to not manufacture products by themselves and procure products from upstream suppliers. Current voices from marketing scholars and practitioners have predominantly focused on the cost benefits when production is outsourced to lower-cost upstream suppliers. In this paper, we study the effects of upward channel decentralization where competing firms can outsource their production to upstream suppliers who do not have any advantages on production costs. We show how downstream firms can still benefit from upward channel decentralization provided their product positioning is endogenous. Thus, we provide a new theory on the strategic benefits of upward channel decentralization. We also use this framework to show a new benefit to manufacturers selling through downstream retailers rather than directly. We examine the implications of our theory for consumer and social welfare, and also draw managerial implications. This paper was accepted by Pradeep Chintagunta, marketing.

Keywords: upward channel decentralization; production outsourcing; product positioning; distribution channel; game theory (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (49)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:57:y:2011:i:4:p:741-751

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