Strategic upfront marketing channel integration as an entry barrier
This paper investigates an organizational design problem concerning whether duopolistic firms competing in a product market should vertically integrate or separate their marketing channels in a dynamic noncooperative game setting. Previous operational research models have shown that the separation of the marketing channel with the adoption of a two-part tariff contract is the dominant strategy compared with integration for each firm if the two firms face retail price competition, and thereby constitutes the subgame perfect Nash equilibrium (SPNE). Contrary to this previous insight, this paper demonstrates that if exogenous parameters that characterize fixed costs, product substitutability, and a demand function fall into a specific region, marketing channel integration dominates the separation strategy when one of the two firms is the incumbent firm while the other is a potential entrant. In other words, the well-known result in the price-setting game can be reversed when we take entry threats into consideration. Specifically, we show that upfront vertical integration of the marketing channel enables the incumbent to deter the entry of the potential competitor and to monopolize the market in the SPNE. This result has operational implications for a firm confronting the threat of potential rivals entering the market, in that the firm can use this apparently inferior strategy as a commitment device, which creates a virtual entry barrier.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
- Atkins, Derek & Liang, Liping, 2010. "A note on competitive supply chains with generalised supply costs," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1316-1320, December.
- Anderson, Edward J. & Bao, Yong, 2010. "Price competition with integrated and decentralized supply chains," European Journal of Operational Research, Elsevier, vol. 200(1), pages 227-234, January.
- Abel P. Jeuland & Steven M. Shugan, 1983. "Managing Channel Profits," Marketing Science, INFORMS, vol. 2(3), pages 239-272.
- Michael Alles & Srikant Datar, 1998. "Strategic Transfer Pricing," Management Science, INFORMS, vol. 44(4), pages 451-461, April.
- Xia, Yusen & Gilbert, Stephen M., 2007. "Strategic interactions between channel structure and demand enhancing services," European Journal of Operational Research, Elsevier, vol. 181(1), pages 252-265, August.
- Chaim Fershtman & Kenneth L Judd, 1984.
"Equilibrium Incentives in Oligopoly,"
642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Xie, Jinxing & Wei, Jerry C., 2009. "Coordinating advertising and pricing in a manufacturer-retailer channel," European Journal of Operational Research, Elsevier, vol. 197(2), pages 785-791, September.
- Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
- K. Sridhar Moorthy, 1988. "Strategic Decentralization in Channels," Marketing Science, INFORMS, vol. 7(4), pages 335-355.
- Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
- Kenji Matsui, 2011. "Strategic Transfer Pricing and Social Welfare under Product Differentiation," European Accounting Review, Taylor & Francis Journals, vol. 20(3), pages 521-550, September.
- Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
- Richard Gilbert & Xavier Vives, 1986. "Entry Deterrence and the Free Rider Problem," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 71-83.
- Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
- Matsui, Kenji, 2011. "Intrafirm trade, arm's-length transfer pricing rule, and coordination failure," European Journal of Operational Research, Elsevier, vol. 212(3), pages 570-582, August.
- Parlar, Mahmut & Weng, Z. Kevin, 2006. "Coordinating pricing and production decisions in the presence of price competition," European Journal of Operational Research, Elsevier, vol. 170(1), pages 211-227, April.
- SeyedEsfahani, Mir Mehdi & Biazaran, Maryam & Gharakhani, Mohsen, 2011. "A game theoretic approach to coordinate pricing and vertical co-op advertising in manufacturer-retailer supply chains," European Journal of Operational Research, Elsevier, vol. 211(2), pages 263-273, June.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:220:y:2012:i:3:p:865-875. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.