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A larger slice or a larger pie? : an empirical investigation of bargaining power in the distribution channel

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Author Info

  • Draganska, Michaela
  • Klapper, Daniel
  • Villas-Boas, Sofia B.

    ()
    (University of California, Berkeley. Dept of agricultural and resource economics and policy)

Abstract

This research aims to provide insights into the determinants of channel profitability and the relative power in the channel by considering consumer demand and the interactions between manufacturers and retailers in an equilibrium model. We use the Nash bargaining solution to determine wholesale prices and thus how margins are split in the channel. Equilibrium margins are a function of demand primitives and of retailer and manufacturer bargaining power. Bargaining power is itself a function of exogenous retail and manufacturer characteristics. The parties' bargaining positions are determined endogenously from the estimated substitution patterns on the demand side. The more they have to lose in a negotiation relative to an outside option, the weaker the bargaining position. We use the proposed bargaining model to investigate the role of the three main factors that have been blamed for the power shift from manufacturers to retailers in recent years (firm size increases, store brand introductions, and service level differentiation). In our empirical analysis of the German market for coffee, we find that bargaining power varies among the different manufacturer- retailer pairs. This result suggests that bargaining power is not an inherent characteristic of a firm but rather depends on the negotiation partner. We are able to confirm empirically previous theoretical findings that there can be cases where the slice of the pie that goes to one of the channel members may decrease but the overall pie increases and compensates for the smaller share of profits.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1046.

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Length: 55pages
Date of creation: 2008
Date of revision:
Handle: RePEc:are:cudare:1046

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Postal: University of California, Giannini Foundation of Agricultural Economics Library, 248 Giannini Hall #3310, Berkeley CA 94720-3310
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Related research

Keywords: bargaining; econometric models;

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References

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Citations

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Cited by:
  1. Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J. & Rickert, Dennis & Wey, Christian, 2013. "Bargaining power in manufacturer-retailer relationships," DICE Discussion Papers 107, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J. & Rickert, Dennis & Wey, Christian, 2013. "Inter-format competition among retailers: The role of private label products in market delineation," DICE Discussion Papers 101, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  3. Kunter, Marcus, 2012. "Coordination via cost and revenue sharing in manufacturer–retailer channels," European Journal of Operational Research, Elsevier, vol. 216(2), pages 477-486.
  4. Carlos Noton & Andrés Elberg, 2013. "Revealing Bargaining Power through Actual Wholesale Prices," Documentos de Trabajo 304, Centro de Economía Aplicada, Universidad de Chile.
  5. Marcel Fritz & Christian Schlereth & Stefan Figge, 2011. "Empirical Evaluation of Fair Use Flat Rate Strategies for Mobile Internet," Business & Information Systems Engineering, Springer, vol. 3(5), pages 269-277, October.
  6. Watanabe, Mariko, 2011. "Competition of the mechanisms : how Chinese home appliance firms coped with default risk of trade credit?," IDE Discussion Papers 312, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  7. Ailawadi, K.H. & Bradlow, E.T. & Draganska, M. & Nijs, V. & Rooderkerk, R.P. & Sudhir, K. & Wilbur, K.C. & Zhang, J., 2010. "Empirical models of manufacturer-retailer interaction: A review and agenda for future research," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4163972, Tilburg University.
  8. Sergio Meza & K. Sudhir, 2010. "Do private labels increase retailer bargaining power?," Quantitative Marketing and Economics, Springer, vol. 8(3), pages 333-363, September.
  9. Walter Beckert, 2011. "Empirical analysis of countervailing power in business-to-business bargaining," CeMMAP working papers CWP32/11, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  10. Duvaleix-Treguer, Sabine & Gaigne, Carl, 2012. "Cost Economies in Hog Production: Feed prices matter," Working Papers 125261, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
  11. Walter Beckert, 2011. "Empirical Analysis of Countervailing Power in Business-to-Business Bargaining," Birkbeck Working Papers in Economics and Finance 1107, Birkbeck, Department of Economics, Mathematics & Statistics.
  12. Moro, Daniele & Paolo, Sckokai & Veneziani, Mario, 2012. "Multi-stage Market Power in the Italian Fresh Meat Industry," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125065, Agricultural and Applied Economics Association.
  13. Stenbacka, Rune & Tombak, Mihkel, 2012. "Make and buy: Balancing bargaining power," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 391-402.
  14. Rickert, Dennis & Wey, Christian & Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J., 2013. "Inter-Format Competition - The Role of Private Label Products in Market Delineation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79797, Verein für Socialpolitik / German Economic Association.

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