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Assessing the Consequences of a Channel Switch

Author

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  • Xinlei (Jack) Chen

    (The Sauder School of Business, University of British Columbia, Vancouver, BC Canada V6T 1Z2)

  • George John

    (The Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

  • Om Narasimhan

    (The Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

Abstract

Switching marketing channels is an expensive and sticky decision. While a number of theories suggest efficiency and strategic differences between channels, there is virtually no work on combining these ideas into an empirically workable methodology to assess the impact of a channel switch. In this study, we undertake to close this gap with an empirical study of the sports drink market, featuring competing producers and heterogeneous channels. We estimate demand and cost parameters for a number of alternative models of competitive interaction and use these estimates to study the switching of Gatorade from its extant (independent wholesaler) channel to the direct store delivery (DSD) channel belonging to Pepsi. Our initial results indicate the following: Pepsi should switch Gatorade to the DSD channel (i) the switch decreases Gatorade's manufacturing cost by at least 14%, (ii) the switch increases the share of profit it can obtain by at least 13%, (iii) the switch enhances demand by the equivalent of a price cut of 4.96¢ for a 32-ounces package. Absent these increases, Pepsi should . Our methodology and results speak to both managers contemplating a channel switch and antitrust authorities faced with the task of evaluating the consequences of a change in vertical structure.

Suggested Citation

  • Xinlei (Jack) Chen & George John & Om Narasimhan, 2008. "Assessing the Consequences of a Channel Switch," Marketing Science, INFORMS, vol. 27(3), pages 398-416, 05-06.
    • Handle: RePEc:inm:ormksc:v:27:y:2008:i:3:p:398-416
    DOI: 10.1287/mksc.1070.0311
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    2. Mümin Kurtuluş & R. Canan Savaskan & Chunlin Wang, 2020. "Drivers and Implications of Direct‐Store‐Delivery in Distribution Channels," Production and Operations Management, Production and Operations Management Society, vol. 29(11), pages 2621-2636, November.
    3. Viswanathan, Madhu & Narasimhan, Om & John, George, 2020. "Economic impact of category captaincy: an examination of assortments and prices," LSE Research Online Documents on Economics 107034, London School of Economics and Political Science, LSE Library.
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    7. Perna, Andrea & Cardinali, Silvio & Gregori, Gian Luca, 2013. "Coping with alternatives in sales organisations: Experiences from an Italian company," jbm - Journal of Business Market Management, Free University Berlin, Marketing Department, vol. 6(3), pages 107-122.
    8. John, George & Reve, Torger, 2010. "Transaction Cost Analysis in Marketing: Looking Back, Moving Forward," Journal of Retailing, Elsevier, vol. 86(3), pages 248-256.
    9. Li, Jia & Moul, Charles C., 2015. "Who should handle retail? Vertical contracts, customer service, and social welfare in a Chinese mobile phone market," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 29-43.

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