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Demand-Investment in Distribution Channels

Author

Listed:
  • Dongsoo Shin

    (Santa Clara University)

  • Roland Strausz

    (HU Berlin)

Abstract

We study a manufacturer's demand-investment decisions in distribution channels subject to double marginalization. Casting this as a mechanism design problem, we show that demand-enhancing investments strengthen retailers' incentives to exploit market power, forcing manufacturers to concede greater rents. Manufacturers therefore optimally restrict product quality or market coverage. We fully characterize which demand parameters create these perverse incentives: increases benefit manufacturers in segments where they control pricing but harm them in segments with binding incentive constraints. This reveals fundamental limits to demand-side investment in vertical relationships.

Suggested Citation

  • Dongsoo Shin & Roland Strausz, 2025. "Demand-Investment in Distribution Channels," Rationality and Competition Discussion Paper Series 553, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:553
    as

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    References listed on IDEAS

    as
    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    2. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
    3. Patrick Bolton & Giacomo Bonanno, 1988. "Vertical Restraints in a Model of Vertical Differentiation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 555-570.
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    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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