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Strategic Decentralization and Channel Coordination

  • Preyas Desai


  • Oded Koenigsberg


  • Devavrat Purohit


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    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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    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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