Note--Channel of Distribution Profits When Channel Members Form Conjectures

It is well known that lower channel profits are achieved in the bilateral (manufacturer-reseller) monopoly if manufacturer and reseller independently optimize their respective profits: They take each other's decisions as given i.e., adopt decision rules that ignore their influence on the other...

Full description

Saved in:
Bibliographic Details
Published in:Marketing science (Providence, R.I.) R.I.), 1988-05, Vol.7 (2), p.202-210
Main Authors: Jeuland, Abel P, Shugan, Steven M
Format: Article
Language:English
Subjects:
channel demand
channel equilibrium
Decision making
Discounts
Duopoly
Economic justification
Equilibrium
Game theory
margins
Profits
reactions
Vertical integration
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:It is well known that lower channel profits are achieved in the bilateral (manufacturer-reseller) monopoly if manufacturer and reseller independently optimize their respective profits: They take each other's decisions as given i.e., adopt decision rules that ignore their influence on the other channel member. Higher profits are achieved if they coordinate their profit maximizing decisions. Consequently, there is an economic justification for (1) vertical integration that by definition prevents conflicting profit objectives or (2) contracts that change channel members' incentives to the compatible objectives of shares of total channel profits. This paper investigates the possibility that coordination might take place without formal arrangements like vertical integration or contracts . The reason for this contention is the casual observation that channel members are often acutely aware of the interdependencies between channel participants. We might thus expect that they will form conjectures about other channel members' reactions to their own actions. We show that rational conjectures lead profit maximizing channel members to adopt modified decisions rules. Can such conjectural decision-making create, at least partially, channel coordination or cooperation ? In other words, can channel members deviate from the Nash equilibrium and thus achieve greater profits? The answer given in this paper is a conditional yes .
ISSN:0732-2399
1526-548X
DOI:10.1287/mksc.7.2.202