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An Industry Equilibrium Analysis of Downstream Vertical Integration

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  • Timothy W. McGuire

    (Graduate School of Industrial Administration, Carnegie-Mellon University, Pittsburgh, Pennsylvania 15213)

  • Richard Staelin

    (Fuqua School of Business, Duke University, Durham, North Carolina 27706)

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    Abstract

    This paper investigates the effect of product substitutability on Nash equilibrium distribution structures in a duopoly where each manufacturer distributes its goods through a single exclusive retailer, which may be either a franchised outlet or a factory store. Static linear demand and cost functions are assumed, and a number of rules about players' expectations of competitors' behavior are examined. It is found that for most specifications product substitutability does influence the equilibrium distribution structure. For low degrees of substitutability, each manufacturer will distribute its product through a company store; for more highly competitive goods, manufacturers will be more likely to use a decentralized distribution system.

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    File URL: http://dx.doi.org/10.1287/mksc.2.2.161
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 2 (1983)
    Issue (Month): 2 ()
    Pages: 161-191

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    Handle: RePEc:inm:ormksc:v:2:y:1983:i:2:p:161-191

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    Related research

    Keywords: channel management; distribution; vertical integration; industry analysis; game; pricing;

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