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Demand Signalling and Screening in Channels of Distribution

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  • Wujin Chu

    (Massachusetts Institute of Technology)

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    Abstract

    This paper examines two ways channel members at the manufacturing and retail ends deal with asymmetric information in the context of new product introduction. A manufacturer who has private information that demand for a new product will be high can differentiate itself from a manufacturer less confident of demand by undertaking high levels of pre-launch advertising and offering a high wholesale price. A retailer, for its part, can screen potentially high demand from potentially low demand products by stipulating a take-it-or-leave-it slotting allowance, the assumption being that the offer will be accepted only by manufacturers confident of sufficient demand to recover the high initial cost of slotting allowances. It is shown that manufacturers prefer to signal demand through advance advertising and wholesale price, retailers to screen demand through slotting allowances. It is shown that, unless advance advertising is sufficiently effective, slotting allowances yield higher total channel profits and higher social welfare.

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    File URL: http://dx.doi.org/10.1287/mksc.11.4.327
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 11 (1992)
    Issue (Month): 4 ()
    Pages: 327-347

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    Handle: RePEc:inm:ormksc:v:11:y:1992:i:4:p:327-347

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    Related research

    Keywords: distribution channels; signalling; screening; slotting allowances; asymmetric information;

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    Cited by:
    1. Geng, Qin & Minutolo, Marcel C., 2010. "Failure fee under stochastic demand and information asymmetry," International Journal of Production Economics, Elsevier, vol. 128(1), pages 269-279, November.
    2. Jung, Heonsoo, 2011. "Signaling quality with new product preannouncements: Vaporware and the role of reference quality," Journal of Business Research, Elsevier, vol. 64(11), pages 1251-1258.
    3. Park, John L., 2001. "Supermarket Product Selection Uncovered: Manufacturer Promotions And The Channel Intermediary," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IAMA), vol. 4(02).
    4. Ursino, Giovanni & Piccolo, Salvatore & Tedeschi, Piero, 2012. "Deceptive advertising with rational buyers," MPRA Paper 42553, University Library of Munich, Germany.
    5. Li, Yongjian & Xu, Lei & Li, Dahui, 2013. "Examining relationships between the return policy, product quality, and pricing strategy in online direct selling," International Journal of Production Economics, Elsevier, vol. 144(2), pages 451-460.
    6. Steve McCorriston, 2002. "Why should imperfect competition matter to agricultural economists?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 29(3), pages 349-371, July.
    7. Gabrielsen, Tommy Staahl, 2005. "Slotting Allowances and Buy-Back Clauses," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24580, European Association of Agricultural Economists.
    8. John Robst & Kimmarie McGOLDRICK, 1999. "The Measurement of Firm Information About Product Demand," Review of Industrial Organization, Springer, vol. 15(2), pages 149-163, September.
    9. Rao, Akshay R. & Mahi, Humaira, 2000. "Slotting Allowances: Empirical Evidence On Their Role In New Product Launches," Working Papers 14348, University of Minnesota, The Food Industry Center.
    10. DeVuyst, Cheryl Sinn, 2000. "Slotting Allowances, Failure Fees And Asymmetric Information In The Grocery Supply Chain," 2000 Annual Meeting, June 29-July 1, 2000, Vancouver, British Columbia 36388, Western Agricultural Economics Association.
    11. von Schlippenbach, Vanessa, 2007. "REGALMIETEN UND DIE EFFIZIENZ VON ZULIEFERERVERTRAGEN (German)," 47th Annual Conference, Weihenstephan, Germany, September 26-28, 2007 7609, German Association of Agricultural Economists (GEWISOLA).
    12. Albaek, Svend & Overgaard, Per Baltzer, 1998. "Receiver discretion in signalling models: Information transmission to competing retailers," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 209-228, March.
    13. Innes, Robert & Hamilton, Stephen F., 2006. "Naked slotting fees for vertical control of multi-product retail markets," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 303-318, March.
    14. Plambeck, Erica L. & Taylor, Terry A., 2004. "Implications of Renegotiation for Optimal Contract Flexibility and Investment," Research Papers 1889, Stanford University, Graduate School of Business.
    15. Caprice, Stéphane & von Schlippenbach, Vanessa, 2013. "One-stop shopping as a cause of slotting fees: A rent-shifting mechanism," DICE Discussion Papers 97, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    16. Shamir, Noam, 2012. "Strategic information sharing between competing retailers in a supply chain with endogenous wholesale price," International Journal of Production Economics, Elsevier, vol. 136(2), pages 352-365.
    17. Adam D. Rennhoff, 2009. "The Competitive Effects of “Consideration Payments”: Lessons from Radio Payola," Working Papers 200904, Middle Tennessee State University, Department of Economics and Finance.
    18. Rabah Amir & Thierry Leiber & Isabelle Maret, 2006. "Channel Performance and Incentives for Retail Cost Misrepresentation," Working Papers of BETA 2006-20, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    19. Abe, Makoto, 1995. "Price and advertising strategy of a national brand against its private-label clone : A signaling game approach," Journal of Business Research, Elsevier, vol. 33(3), pages 241-250, July.
    20. Ian Sheldon & Richard Sperling, 2003. "Estimating the Extent of Imperfect Competition in the Food Industry: What Have We Learned?," Journal of Agricultural Economics, Wiley Blackwell, vol. 54(1), pages 89-109.
    21. Glenn, David, 2004. "Returns Policies for a Pessimistic Retailer," Working Papers 04-0111, University of Illinois at Urbana-Champaign, College of Business.
    22. Anne Coughlan & S. Choi & Wujin Chu & Charles Ingene & Sridhar Moorthy & V. Padmanabhan & Jagmohan Raju & David Soberman & Richard Staelin & Z. Zhang, 2010. "Marketing modeling reality and the realities of marketing modeling," Marketing Letters, Springer, vol. 21(3), pages 317-333, September.
    23. Pio Baake & Vanessa Schlippenbach, 2014. "The Impact of Upfront Payments on Assortment Decisions in Retailing," Review of Industrial Organization, Springer, vol. 44(1), pages 95-111, February.

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