Demand-Investment in Distribution Channels

Dongsoo Shin and Roland Strausz
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Dongsoo Shin: Santa Clara University

No 553, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We study a manufacturer's demand-investment decisions in distribution channels subject to double marginalization. Casting this as a mechanism design problem, we show that demand-enhancing investments strengthen retailers' incentives to exploit market power, forcing manufacturers to concede greater rents. Manufacturers therefore optimally restrict product quality or market coverage. We fully characterize which demand parameters create these perverse incentives: increases benefit manufacturers in segments where they control pricing but harm them in segments with binding incentive constraints. This reveals fundamental limits to demand-side investment in vertical relationships.

Keywords: demand; investment incentives; distribution channels; double marginalization (search for similar items in EconPapers)
JEL-codes: D21 D82 L11 (search for similar items in EconPapers)
Date: 2025-11-25
New Economics Papers: this item is included in nep-com, nep-des, nep-ind and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:553

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