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Distribution Channel Decentralization and Strategic Durability Choice

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  • Gregory Goering

Abstract

In a simple two-period setting we examine a decentralized distribution (marketing) channel consisting of an up-stream durable-goods manufacturer and down-stream retailer. The manufacturer sets the wholesale price and the product's durability while the retailer selects an output level. We show that in this setting, the profit-maximizing manufacturer unambiguously selects a higher durability than the socially efficient (cost-minimizing) level in both uncommitted sales and rental markets. We show this 'reversed planned obsolescence' result is due to the strategic benefit of durability in this double-marginalization (double monopoly mark-up) setting. This is in stark contrast to the usual integrated channel result where the profit-maximizing manufacturer will select an efficient level of durability in rental markets and an inefficiently low durability in uncommitted sales markets (due to the selling firm's commitment problem with potential buyers). Intuitively, with a decentralized distribution channel, the manufacturer faces potential commitment problems with both current buyers and its down-stream retailer. We show, only in cases where both sources of commitment issues are removed (i.e. the manufacturer can credibly commit to both potential buyers and its retailer), will the profit-maximizing durability choice be socially efficient.

Suggested Citation

  • Gregory Goering, 2010. "Distribution Channel Decentralization and Strategic Durability Choice," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 17(2), pages 167-186.
  • Handle: RePEc:taf:ijecbs:v:17:y:2010:i:2:p:167-186
    DOI: 10.1080/13571516.2010.483086
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