Distribution Channel Decentralization and Strategic Durability Choice

Gregory Goering

International Journal of the Economics of Business, 2010, vol. 17, issue 2, 167-186

Abstract: In a simple two-period setting we examine a decentralized distribution (marketing) channel consisting of an up-stream durable-goods manufacturer and down-stream retailer. The manufacturer sets the wholesale price and the product's durability while the retailer selects an output level. We show that in this setting, the profit-maximizing manufacturer unambiguously selects a higher durability than the socially efficient (cost-minimizing) level in both uncommitted sales and rental markets. We show this 'reversed planned obsolescence' result is due to the strategic benefit of durability in this double-marginalization (double monopoly mark-up) setting. This is in stark contrast to the usual integrated channel result where the profit-maximizing manufacturer will select an efficient level of durability in rental markets and an inefficiently low durability in uncommitted sales markets (due to the selling firm's commitment problem with potential buyers). Intuitively, with a decentralized distribution channel, the manufacturer faces potential commitment problems with both current buyers and its down-stream retailer. We show, only in cases where both sources of commitment issues are removed (i.e. the manufacturer can credibly commit to both potential buyers and its retailer), will the profit-maximizing durability choice be socially efficient.

Keywords: Channel Decentralization; Durable Goods; Strategy (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/10.1080/13571516.2010.483086 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ijecbs:v:17:y:2010:i:2:p:167-186

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/CIJB20

DOI: 10.1080/13571516.2010.483086

Access Statistics for this article

International Journal of the Economics of Business is currently edited by Eleanor Morgan

More articles in International Journal of the Economics of Business from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().