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Implicit Understandings in Channels of Distribution

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  • Steven M. Shugan

    (Graduate School of Business, University of Chicago, Chicago, Illinois 60637)

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    Abstract

    Formal agreements can be used to achieve coordination among channel members. These agreements work by exerting explicit control over the members who make the agreements. However, implicit understandings can be used as a partial substitute for more formal agreements. In this paper, we show that implicit understandings can develop as channel members learn about each other's behavior. We show that ... --This learning leads to the use of the implicit influence each channel member has over the other's behavior. -- The learning leading to an implicit understanding requires some form of experimentation or historical observation. -- This learning results in an oscillating retail price. -- When only one channel member learns the other's behavior, both channel members obtain greater profits than when neither member learns, and both channel members obtain less profits than when both members learn. However, the member who does not learn obtains more profits than the member who learns. We also show that ... -- Implicit understandings result in greater channel profits than in their absence. -- Implicit understandings cannot fully substitute for an explicit contract. -- Implicit understandings result in a retail price which is higher than the price resulting from an explicit contract but lower than the price resulting in the absence of an implicit understanding. -- Implicit understandings develop as channel members learn each other's behavior. We demonstrate that the form of learning discussed in this paper is consistent with a somewhat general demand function. Finally, the paper provides some examples of both symmetrical learning, where both channel members learn at the same speed and asymmetrical learning where channel members learn at different speeds.

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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 31 (1985)
    Issue (Month): 4 (April)
    Pages: 435-460

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    Handle: RePEc:inm:ormnsc:v:31:y:1985:i:4:p:435-460

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    Related research

    Keywords: marketing channels; bilateral monopoly; noncooperative games; rational expectations;

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    Cited by:
    1. Andersen, Otto & Buvik, Arnt, 2001. "Inter-firm co-ordination: international versus domestic buyer-seller relationships," Omega, Elsevier, vol. 29(2), pages 207-219, April.
    2. Michaela Draganska & Daniel Klapper & Sofia B. Villas-Boas, 2010. "A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel," Marketing Science, INFORMS, vol. 29(1), pages 57-74, 01-02.
    3. Zhang, Rong & Liu, Bin & Wang, Wenliang, 2012. "Pricing decisions in a dual channels system with different power structures," Economic Modelling, Elsevier, vol. 29(2), pages 523-533.
    4. Wang, Charles X. & Webster, Scott & Zhang, Sidong, 2011. "A comparison of two sourcing tactics for a new component," European Journal of Operational Research, Elsevier, vol. 211(2), pages 310-317, June.
    5. Huang, Zhimin & Li, Susan X., 2001. "Co-op advertising models in manufacturer-retailer supply chains: A game theory approach," European Journal of Operational Research, Elsevier, vol. 135(3), pages 527-544, December.

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