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Managing a Distribution Channel Under Asymmetric Information with Performance Requirements

Author

Listed:
  • Ramarao Desiraju

    (Department of Business Administration, University of Delaware, Newark, Delaware 19716)

  • Sridhar Moorthy

    (William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York 14627)

Abstract

In this paper we study how performance requirements may improve the working of a distribution channel when the retailer is better informed about demand conditions than the manufacturer. Performance requirements means that the manufacturer and retailer agree to (1) have the manufacturer set requirements on retail price or service or both, and (2) jointly invest in the information systems required to monitor the retailer's compliance with the requirements. We show that performance requirements on price and service will improve channel performance. But if requirements cannot be set on both performance dimensions, the choice among the remaining options is not straightforward. Price requirements may be worse than no requirements, and service requirements no better. The central problem with setting requirements on only one dimension is that the retailer then behaves suboptimally on the other. Between the two partial options, service requirements are better than price requirements in aligning the interests of the manufacturer and the retailer, whereas price requirements are better at inducing the retailer to reveal his demand.

Suggested Citation

  • Ramarao Desiraju & Sridhar Moorthy, 1997. "Managing a Distribution Channel Under Asymmetric Information with Performance Requirements," Management Science, INFORMS, vol. 43(12), pages 1628-1644, December.
    • Handle: RePEc:inm:ormnsc:v:43:y:1997:i:12:p:1628-1644
    DOI: 10.1287/mnsc.43.12.1628
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    Keywords

    pay-for-performance; distribution channels;

    JEL classification:

    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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