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Friction in Related-Party Trade When a Rival Is Also a Customer

Author

Listed:
  • Anil Arya

    () (Fisher College of Business, Ohio State University, Columbus, Ohio 43210)

  • Brian Mittendorf

    () (School of Management, Yale University, New Haven, Connecticut 06520)

  • Dae-Hee Yoon

    () (School of Management, Yale University, New Haven, Connecticut 06520)

Abstract

There are many circumstances in which manufacturers provide inputs to wholesale customers only to subsequently compete with these wholesale customers in the retail realm. Such dual distribution arrangements commonly suffer from excessive encroachment in that the manufacturer's ex post retail aggression is harmful ex ante because it undercuts potential wholesale profits. This paper demonstrates that with dual distribution, a manufacturer can benefit from decentralized control and the use of transfer prices above marginal cost. Although these arrangements often create coordination concerns, a moderate presence of such concerns permits the manufacturer to credibly convey to its wholesale customer that it will not excessively encroach on its retail territory. This, in turn, permits the manufacturer to reap greater wholesale profits. We also note that this force can point to a silver lining in arm's-length (parity) requirements on transfer pricing in that they can solidify commitments to a particular retail posture.

Suggested Citation

  • Anil Arya & Brian Mittendorf & Dae-Hee Yoon, 2008. "Friction in Related-Party Trade When a Rival Is Also a Customer," Management Science, INFORMS, vol. 54(11), pages 1850-1860, November.
  • Handle: RePEc:inm:ormnsc:v:54:y:2008:i:11:p:1850-1860
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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0906
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kim, Bosung & Park, Kun Soo, 2016. "Organizational structure of a global supply chain in the presence of a gray market: Information asymmetry and valuation difference," International Journal of Production Economics, Elsevier, vol. 175(C), pages 71-80.
    2. repec:eee:ejores:v:266:y:2018:i:1:p:88-98 is not listed on IDEAS
    3. Yang, Shilei & Shi, Victor & Jackson, Jonathan E., 2015. "Manufacturers׳ channel structures when selling asymmetric competing products," International Journal of Production Economics, Elsevier, vol. 170(PB), pages 641-651.
    4. Choe, Chongwoo & Matsushima, Noriaki, 2013. "The arm's length principle and tacit collusion," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 119-130.
    5. Dehghan Nejad, Omid, 2011. "Does customer relationship management matter in the banking system? the case of Iran," MPRA Paper 31478, University Library of Munich, Germany.
    6. Xiong, Yu & Zhou, Yu & Li, Gendao & Chan, Hing-Kai & Xiong, Zhongkai, 2013. "Don’t forget your supplier when remanufacturing," European Journal of Operational Research, Elsevier, vol. 230(1), pages 15-25.
    7. Björn Brand & Michael Grothe, 2015. "Social responsibility in a bilateral monopoly," Journal of Economics, Springer, vol. 115(3), pages 275-289, July.
    8. repec:pal:jorsoc:v:68:y:2017:i:12:d:10.1057_s41274-016-0169-0 is not listed on IDEAS
    9. Marcel Goi'{c} & Kinshuk Jerath & Kannan Srinivasan, 2011. "Cross-Market Discounts," Marketing Science, INFORMS, vol. 30(1), pages 134-148, 01-02.
    10. Moresi, Serge & Schwartz, Marius, 2017. "Strategic incentives when supplying to rivals with an application to vertical firm structure," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 137-161.
    11. repec:gam:jsusta:v:10:y:2018:i:1:p:151-:d:126135 is not listed on IDEAS
    12. Arya, Anil & Mittendorf, Brian, 2013. "Discretionary disclosure in the presence of dual distribution channels," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 168-182.
    13. Serge Moresi & Marius Schwartz, 2015. "Strategic Incentives When Supplying to Rivals," Working Papers gueconwpa~15-15-05, Georgetown University, Department of Economics.
    14. Pei-Cheng Liao, 2014. "Input Prices as Signals of Costs to a Downstream Rival and Customer," The Japanese Economic Review, Japanese Economic Association, vol. 65(3), pages 414-430, September.
    15. Alonso-Pauli, Eduard & Bru, Lluís, 2018. "Strategic delegation in procurement," MPRA Paper 84293, University Library of Munich, Germany.

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