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Renting Goodwill in International Marketing Channels: An Analysis of Pricing Strategies and Bargaining Power

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Author Info

  • Carlyle Farrell
  • Gervan Fearon

Abstract

This paper investigates the pricing decisions of foreign manufacturers in international markets within a bargaining framework with asymmetric information and the rental of goodwill. The key findings are: first, the foreign manufacturer follows a mark-up pricing strategy in which its gross margin and the quality premium over the domestic product are shared with the importer. Second, a manufacturer–importer contract occurs only when the manufacturer’s bargaining power is within an admissible range which shrinks as transaction costs increase. Third, the domestic consumer will only purchase the foreign product if the importer’s goodwill in the domestic market is sufficiently large to signal quality. The paper contributes to the literature on exchange relationships between foreign manufacturers and importers. Copyright International Atlantic Economic Society 2005

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File URL: http://hdl.handle.net/10.1007/s11293-005-0029-9
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Bibliographic Info

Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 33 (2005)
Issue (Month): 3 (September)
Pages: 285-296

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Handle: RePEc:kap:atlecj:v:33:y:2005:i:3:p:285-296

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Keywords: C70; D40; FO;

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References

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  1. D. Abreu & F. Gul, 1998. "Bargaining and Reputation," Princeton Economic Theory Papers 00s9, Economics Department, Princeton University.
  2. Scaramozzino, Pasquale, 1991. "Bargaining with Outside Options: Wages and Employment in UK Manufacturing 1974-82," Economic Journal, Royal Economic Society, vol. 101(405), pages 331-42, March.
  3. Birger Wernerfelt, 1988. "Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 458-466, Autumn.
  4. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  5. Wujin Chu & Woosik Chu, 1994. "Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent," Marketing Science, INFORMS, vol. 13(2), pages 177-189.
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  7. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
  8. Martin A. Lariviere & V. Padmanabhan, 1997. "Slotting Allowances and New Product Introductions," Marketing Science, INFORMS, vol. 16(2), pages 112-128.
  9. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  10. Sridhar Moorthy & Kannan Srinivasan, 1995. "Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs," Marketing Science, INFORMS, vol. 14(4), pages 442-466.
  11. Preyas S. Desai, 2000. "Multiple Messages to Retain Retailers: Signaling New Product Demand," Marketing Science, INFORMS, vol. 19(4), pages 381-389, August.
  12. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  13. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
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