Channel Dynamics Under Price and Service Competition

TLDR

The study examines a distribution system where a manufacturer supplies a common product to two independent retailers who compete on both service and retail price for end customers. The authors investigate how each firm’s strategy drivers affect total sales, market share, and profitability. They characterize wholesale pricing mechanisms that can coordinate the system, showing that linear order‑quantity formats achieve coordination only under very limiting conditions. The analysis reveals that competition intensity across price and service dimensions, along with retailer cooperation, critically shapes outcomes; in some cases both retailers prefer higher competitive intensity, and the results extend existing knowledge of manufacturer wholesale pricing by explaining behaviors that emerge only when both price and service competition are present.

Abstract

This paper studies a distribution system in which a manufacturer supplies a common product to two independent retailers, who in turn use service as well as retail price to directly compete for end customers. We examine the drivers of each firm's strategy, and the consequences for total sales, market share, and profitability. We show that the relative intensity of competition with respect to each competitive dimension plays a key role, as does the degree of cooperation between the retailers. We discover a number of insights concerning the preferences of each party regarding competition. For instance, there will be circumstances under which both retailers would prefer an increase in competitive intensity. Our analysis generalizes existing knowledge about manufacturer wholesale pricing strategies, and rationalizes behaviors that would not be evident without both price and service competition. Finally, we characterize the structure of wholesale pricing mechanisms that can coordinate the system, and show that the most commonly used formats (those that are linear in the order quantity) can achieve coordination only under very limiting conditions.