Distribution Channel Relationships in the Presence of Multimarket Contact

Traditional analyses of firms that compete in multiple markets examine settings in which firms sell directly to consumers. However, in many industries, firms sell their products through intermediaries. Importantly, these firms usually have common intermediaries, and the degree of this overlap varies across markets and over time. We empirically study the effect of the asymmetry of distribution channel relationship overlap across markets on retail prices. An increase in distribution channel relationship asymmetry can provide firms with an enhanced ability to punish rivals through shared distribution relationships in addition to shared markets. This increased ability to punish can then soften competition (increase prices), that is, the mutual forbearance mechanism. However, an increase in distribution channel relationship asymmetry can also make it difficult for firms to pursue similar goals with their rivals, and thus weakening the potential for tacit coordination. This can then intensify competition (reduce prices), that is, the goal congruence mechanism. Due to these opposing mechanisms, the net impact of distribution channel relationship asymmetry on competitive intensity is not clear. Using extensive scanner panel data for multiple product categories, on average, we find that an increase in distribution channel relationship asymmetry results in higher retail prices. Consistent with the mutual forbearance mechanism, this effect becomes more positive (or less negative) when (i) the manufacturer size or the number of retail stores in the focal market increases or (ii) when the manufacturer is a public (vs. private) firm. Conversely, the effect becomes less positive when the strategic similarity among manufacturers increases, in line with the goal congruence mechanism.