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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
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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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