Working Paper: CEPR ID: DP13642
Authors: Roman Inderst; Greg Shaffer
Abstract: The channel-coordination literature typically focuses on how a supplier canovercome channel inefficiencies stemming from misaligned pricing incentives. In contrast, we show that when an incumbent supplier faces competition from other suppliers to supply the downstream firms, it may want to create inefficiencies. Our analysis offers useful prescriptions for how incumbent suppliers should react to competitive threats by smaller competitors, how manufacturers should react to powerful retailers who can produce their own private-label brands, and how upstream firms should optimally treat downstream firms who may have different marginal costs of distribution. Our analysis also explains why wholesale prices and thus final-goods prices would be expected to decrease when there is an increase in upstream or downstream competition.
Keywords: channel coordination; game theory; distribution channels
JEL Codes: L13; L41; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Supplier's pricing strategy (L11) | Downstream firms' outside options (L29) |
| Downstream competition (D41) | Wholesale prices (L11) |
| Downstream competition (D41) | Retail prices (P22) |
| Alternative upstream options (Q42) | Wholesale prices (L11) |
| Supplier's pricing strategy (L11) | Downstream competition (D41) |
| Supplier's lower marginal wholesale prices (L11) | Competitiveness of less efficient downstream firms (L11) |
| Competitiveness of less efficient downstream firms (L11) | Balanced sales across competing channels (L14) |