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On Credible Delegation by Oligopolists: A Discussion of Distribution Channel Management

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Author Info

  • Anne T. Coughlan

    (J. L. Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208)

  • Birger Wernerfelt

    (J. L. Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208)

Abstract

Several papers in the recent marketing literature have suggested that delegation in distribution (e.g., the use of independent middlemen) helps manufacturers to precommit strategically to profit-enhancing competitive actions. Further, the literature suggests that the profitability of such actions depends on market structure. We challenge these conclusions here. This is done in two steps. First, we perform an analysis of the entire class of models which have been used in the literature. Using internally consistent assumptions about market structure and contracting, the only subgame perfect equilibrium is one in which all distribution channels have infinitely many levels of delegation. Obviously, this is not what we see in the real world. Next, we relax a key hidden assumption, namely that all intra-channel agreements are observable to competitors. Without this assumption, the usual results unravel. Unless channel members can offer credible guarantees that unobservable agreements do not exist, the strategic effects of delegation disappear. Since these guarantees are virtually impossible to maintain credibly, we would expect to reject the hypothesis in the earlier literature relating channel structure to competition in an empirical study controlling for observability. We conclude that mechanisms other than strategic ones must be responsible for the existence of delegated channels, and make some suggestions about promising avenues for future theory research in channel structure.

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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 35 (1989)
Issue (Month): 2 (February)
Pages: 226-239

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Handle: RePEc:inm:ormnsc:v:35:y:1989:i:2:p:226-239

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Keywords: marketing; distribution;

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Cited by:
  1. Xie, Gang & Wang, Shouyang & Lai, K.K., 2011. "Quality improvement in competing supply chains," International Journal of Production Economics, Elsevier, vol. 134(1), pages 262-270, November.
  2. Stiegert, Kyle W. & Wang, Shinn-Shyr, 2003. "Imperfect Competition And Strategic Trade Theory: What Have We Learned," Working Papers 14589, International Agricultural Trade Research Consortium.
  3. Dmitri Kuksov, 2009. "Communication strategy in partnership selection," Quantitative Marketing and Economics, Springer, vol. 7(3), pages 267-288, September.
  4. Chen, Jing & Bell, Peter C., 2011. "Coordinating a decentralized supply chain with customer returns and price-dependent stochastic demand using a buyback policy," European Journal of Operational Research, Elsevier, vol. 212(2), pages 293-300, July.
  5. Wu, Chongqi & Mallik, Suman, 2005. "Channel Structure, Cross Sales, and Vertical Integration in a Multi-channel Distribution System," Working Papers 05-0127, University of Illinois at Urbana-Champaign, College of Business.
  6. Jansen, Jos, 2003. "Coexistence of strategic vertical separation and integration," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 699-716, May.
  7. Desai, Vijay S., 1996. "Interactions between members of a marketing-production channel under seasonal demand," European Journal of Operational Research, Elsevier, vol. 90(1), pages 115-141, April.
  8. Hamilton, Stephen F. & Requate, Till, 2004. "Vertical structure and strategic environmental trade policy," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 260-269, March.
  9. Zhang, Wenqing & Li, Shanling & Zhang, Dan & Hou, Wenhua, 2014. "On the impact of advertising initiatives in supply chains," European Journal of Operational Research, Elsevier, vol. 234(1), pages 99-107.
  10. Rangan, V. Kasturi & Nueno, Jose L., 1999. "Channel strategy adaptation," IESE Research Papers D/380, IESE Business School.
  11. Ravi Kumar, K. & Loomba, Arvinder P. S. & Hadjinicola, George C., 2000. "Marketing-production coordination in channels of distribution," European Journal of Operational Research, Elsevier, vol. 126(1), pages 189-217, October.
  12. Hendrikse, G.W.J., 2011. "Pooling, Access, and Countervailing Power in Channel Governance," ERIM Report Series Research in Management ERS-2011-009-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  13. Yang, Shan-Lin & Zhou, Yong-Wu, 2006. "Two-echelon supply chain models: Considering duopolistic retailers' different competitive behaviors," International Journal of Production Economics, Elsevier, vol. 103(1), pages 104-116, September.
  14. Ziss, Steffen, 1999. "Divisionalization and strategic managerial incentives in oligopoly under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 17(8), pages 1163-1187, November.
  15. Villas-Boas, Sofia B., 2006. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0z26d2v9, Department of Agricultural & Resource Economics, UC Berkeley.
  16. Hamilton, Stephen F. & Stiegert, Kyle W., 2002. "An empirical test of the rent-shifting hypothesis: the case of state trading enterprises," Journal of International Economics, Elsevier, vol. 58(1), pages 135-157, October.
  17. Pradeep Bhardwaj & Sridhar Balasubramanian, 2005. "Managing Channel Profits: The Role of Managerial Incentives," Quantitative Marketing and Economics, Springer, vol. 3(3), pages 247-279, September.
  18. 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.

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