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Strategic Decentralization and Channel Coordination

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Author Info

  • Preyas Desai

    ()

  • Oded Koenigsberg

    ()

  • Devavrat Purohit

    ()

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    Abstract

    In this paper, we show that under certain conditions, strategic decentralization through the addition of a retailer in the distribution channel can increase a manufacturer's profits. The specific case on which we focus is the quantity coordination (double marginalization) problem for a manufacturer selling durable goods in a two-period setting. We show that the standard solution that coordinates a channel for non-durables does not coordinate the channel for durables. In particular, even though a manufacturer can achieve channel coordination by offering per-period, two-part fees, the equilibrium wholesale price in the first period is strictly above the manufacturer's marginal cost. This is in stark contrast to the two-part solution for non-durables where the equilibrium wholesale price is equal to marginal cost. We also identify a strategy that solves both the channel coordination and the Coase problem associated with durable goods. In this strategy, at the beginning of period 1, the manufacturer writes a contract with the retailer specifying a fixed fee and wholesale prices covering both periods. We show that by adding a retailer and using this contract, the manufacturer makes higher profits than it could if it were to sell directly to consumers.

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    Bibliographic Info

    Article provided by Springer in its journal Quantitative Marketing and Economics.

    Volume (Year): 2 (2004)
    Issue (Month): 1 (03)
    Pages: 5-22

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    Handle: RePEc:kap:qmktec:v:2:y:2004:i:1:p:5-22

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    Web page: http://www.springerlink.com/link.asp?id=111240

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    Cited by:
    1. Jianqiang Zhang & Weijun Zhong & Shue Mei, 2012. "Competitive effects of informative advertising in distribution channels," Marketing Letters, Springer, vol. 23(3), pages 561-584, September.
    2. Yusong Wang & David Bell & V. Padmanabhan, 2009. "Manufacturer-owned retail stores," Marketing Letters, Springer, vol. 20(2), pages 107-124, June.
    3. Anthony Dukes & Tansev Geylani & Yunchuan Liu, 2014. "Dominant retailers’ incentives for product quality in asymmetric distribution channels," Marketing Letters, Springer, vol. 25(1), pages 93-107, March.
    4. Jeffrey Shulman & Anne Coughlan, 2007. "Used goods, not used bads: Profitable secondary market sales for a durable goods channel," Quantitative Marketing and Economics, Springer, vol. 5(2), pages 191-210, June.
    5. Xuan Zhao & Derek Atkins & Yong Liu, 2009. "Effects of distribution channel structure in markets with vertically differentiated products," Quantitative Marketing and Economics, Springer, vol. 7(4), pages 377-397, December.
    6. Palsule-Desai, Omkar D. & Tirupati, Devanath & Chandra, Pankaj, 2013. "Stability issues in supply chain networks: Implications for coordination mechanisms," International Journal of Production Economics, Elsevier, vol. 142(1), pages 179-193.
    7. Eyal Biyalogorsky & Oded Koenigsberg, 2010. "Ownership coordination in a channel: Incentives, returns, and negotiations," Quantitative Marketing and Economics, Springer, vol. 8(4), pages 461-490, December.
    8. Wu, Cheng-Han & Chen, Chieh-Wan & Hsieh, Chung-Chi, 2012. "Competitive pricing decisions in a two-echelon supply chain with horizontal and vertical competition," International Journal of Production Economics, Elsevier, vol. 135(1), pages 265-274.
    9. Wilfred Amaldoss & Teck-Hua Ho & Aradhna Krishna & Kay-Yut Chen & Preyas Desai & Ganesh Iyer & Sanjay Jain & Noah Lim & John Morgan & Ryan Oprea & Joydeep Srivasatava, 2008. "Experiments on strategic choices and markets," Marketing Letters, Springer, vol. 19(3), pages 417-429, December.
    10. Oded Koenigsberg & Eitan Muller & Naufel Vilcassim, 2008. "easyJet® pricing strategy: Should low-fare airlines offer last-minute deals?," Quantitative Marketing and Economics, Springer, vol. 6(3), pages 279-297, September.

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