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A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel

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Author Info

  • Michaela Draganska

    ()
    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Daniel Klapper

    ()
    (Goethe-Universität Frankfurt, D-60325 Frankfurt am Main, Germany)

  • Sofia B. Villas-Boas

    ()
    (Department of Agricultural and Resource Economics, University of California, Berkeley, Berkeley, California 94720)

Abstract

This research aims to provide insights into the determinants of channel profitability and the relative power in the channel by considering consumer demand and the interactions between manufacturers and retailers in an equilibrium model. We use the Nash bargaining solution to determine wholesale prices and thus how margins are split in the channel. Equilibrium margins are a function of demand primitives and of retailer and manufacturer bargaining power. Bargaining power is itself a function of exogenous retail and manufacturer characteristics. The parties' bargaining positions are determined endogenously from the estimated substitution patterns on the demand side. The more they have to lose in a negotiation relative to an outside option, the weaker the bargaining position. We use the proposed bargaining model to investigate the role of the three main factors that have been blamed for the power shift from manufacturers to retailers in recent years (firm-size increases, store-brand introductions, and service-level differentiation). In our empirical analysis of the German market for coffee, we find that bargaining power varies among the different manufacturer-retailer pairs. This result suggests that bargaining power is not an inherent characteristic of a firm but rather depends on the negotiation partner. We are able to confirm empirically previous theoretical findings that there can be cases where the slice of the pie that goes to one of the channel members may decrease, but the overall pie increases and compensates for the smaller share of profits.

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File URL: http://dx.doi.org/10.1287/mksc.1080.0472
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Bibliographic Info

Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 29 (2010)
Issue (Month): 1 (01-02)
Pages: 57-74

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Handle: RePEc:inm:ormksc:v:29:y:2010:i:1:p:57-74

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Related research

Keywords: bargaining; distribution channels; competitive strategy; econometric models;

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References

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Citations

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Cited by:
  1. Walter Beckert, 2011. "Empirical analysis of countervailing power in business-to-business bargaining," CeMMAP working papers CWP32/11, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Kunter, Marcus, 2012. "Coordination via cost and revenue sharing in manufacturer–retailer channels," European Journal of Operational Research, Elsevier, vol. 216(2), pages 477-486.
  3. Kusum Ailawadi & Eric Bradlow & Michaela Draganska & Vincent Nijs & Robert Rooderkerk & K. Sudhir & Kenneth Wilbur & Jie Zhang, 2010. "Empirical models of manufacturer-retailer interaction: A review and agenda for future research," Marketing Letters, Springer, vol. 21(3), pages 273-285, September.
  4. Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J. & Rickert, Dennis & Wey, Christian, 2013. "Bargaining power in manufacturer-retailer relationships," DICE Discussion Papers 107, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  5. Bonnet, Céline & Bouamra-Mechemache, Zohra, 2014. "Organic label, bargaining power, and profit sharing in the French fluid milk market," TSE Working Papers 14-493, Toulouse School of Economics (TSE).
  6. Stefan Buehler & Dennis L. Gäertner, 2013. "Making Sense of Nonbinding Retail-Price Recommendations," American Economic Review, American Economic Association, vol. 103(1), pages 335-59, February.
  7. Carlos Noton & Andres Elberg, 2014. "Revealing Bargaining Power through Actual Wholesale Prices," Working Papers 51, Facultad de Economía y Empresa, Universidad Diego Portales.
  8. Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J. & Rickert, Dennis & Wey, Christian, 2013. "Inter-format competition among retailers: The role of private label products in market delineation," DICE Discussion Papers 101, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  9. Gautam Gowrisankaran & Aviv Nevo & Robert Town, 2013. "Mergers When Prices are Negotiated: Evidence from the Hospital Industry," NBER Working Papers 18875, National Bureau of Economic Research, Inc.
  10. Duvaleix-Treguer, Sabine & Gaigne, Carl, 2012. "Cost Economies in Hog Production: Feed prices matter," Working Papers 125261, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
  11. Stenbacka, Rune & Tombak, Mihkel, 2012. "Make and buy: Balancing bargaining power," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 391-402.
  12. Sergio Meza & K. Sudhir, 2010. "Do private labels increase retailer bargaining power?," Quantitative Marketing and Economics, Springer, vol. 8(3), pages 333-363, September.
  13. Bragelien, Iver & Impink, Joost, 2014. "Relationship-Specificity, Bargaining Power Growth, and Firm Performance," Discussion Papers 2014/4, Department of Business and Management Science, Norwegian School of Economics.
  14. Marcel Fritz & Christian Schlereth & Stefan Figge, 2011. "Empirical Evaluation of Fair Use Flat Rate Strategies for Mobile Internet," Business & Information Systems Engineering, Springer, vol. 3(5), pages 269-277, October.
  15. Moro, Daniele & Paolo, Sckokai & Veneziani, Mario, 2012. "Multi-stage Market Power in the Italian Fresh Meat Industry," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125065, Agricultural and Applied Economics Association.
  16. Watanabe, Mariko, 2011. "Competition of the mechanisms : how Chinese home appliance firms coped with default risk of trade credit?," IDE Discussion Papers 312, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  17. Carlos Noton & Andrés Elberg, 2013. "Revealing Bargaining Power through Actual Wholesale Prices," Documentos de Trabajo 304, Centro de Economía Aplicada, Universidad de Chile.
  18. Walter Beckert, 2011. "Empirical Analysis of Countervailing Power in Business-to-Business Bargaining," Birkbeck Working Papers in Economics and Finance 1107, Birkbeck, Department of Economics, Mathematics & Statistics.

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