[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v18y1999i1p59-76.html
   My bibliography  Save this article

Manufacturer Allowances and Retailer Pass-Through Rates in a Competitive Environment

Author

Listed:
  • Sang Yong Kim

    (Korea Advanced Institute of Science & Technology, Graduate School of Management, 207-43 Cheongryangri, Dengdaemun, Seoul 130-012, South Korea)

  • Richard Staelin

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract
A commonly held belief has grocery and mass merchandise retailers gaining power relative to the upstream consumer package goods manufacturers. One of the major justifications for this belief is that manufacturers are now giving retailers more side payments such as trade allowances, slotting allowances, etc. However, a number of researchers have shown that these concessions have not translated into increased profit for the retailer relative to the manufacturer. This paper explores, via an analytic model, why one might see retailers getting concessions from the manufacturer without being able to translate them into high profits. We do this by representing the interaction between the channel members as a one-period profit maximizing game where manufacturers decide on how large a side payment (i.e., a concession) to give to each retailer and retailers decide on how much of this side payment to use to promote the manufacturer's product. At the heart of our model is a demand function for each product offering (i.e., a specific brand sold by a specific retailer). This demand function is linear in own and other's prices, but based on empirical evidence is assumed to be nonlinear in the effects of merchandising activities (e.g., short term price discounts, better shelf space, advertising, etc.). Specifically, merchandising effects are modeled with a square root function that also acknowledges most short-term promotional effects result in brand or store switching versus increase category volume. The model is composed of six parameters. These are the inherent popularity of the brand at a particular outlet, own price sensitivity, cross (but within the store) price sensitivity, customer's sensitivity to within store promotion activities, customer's sensitivity to between store promotional activities, and the degree to which promotional activities yield incremental product category sales. We use our underlying demand formulation to find the equilibrium solution to the full information, Stackelberg leader game for different store and brand loyalty environments as captured by our six parameters. These parameters are chosen based on empirical evidence to span possible market conditions that each channel member might have. Our findings and modeling efforts should be of interest to analytic channel modelers and scholars interested in the mass merchandising and grocery store industries. For a theoretical point of view we build upon the Case 4 model of Lee and Staelin (1997) to allow for promotional activities. From a substantive point of view we show that manufacturers will freely give retailers side payments even though they know these retailers will pocket a substantial portion of this concession. Moreover, we identify conditions within our model that lead to larger allowances, lower pass through rates, and lower retail profits; outcomes that are compatible with recent industry trends. In addition, we highlight the difference in effect on profits, prices, etc. of changes in consumers sensitivity to inter-store differences in storewide merchandising activities. One of the more counter-intuitive results of these analyses is that it is in the manufacturer's best interest to help retailers increase their spatial monopoly by decreasing consumers' tendency to cross-store shop because of merchandising activities.

Suggested Citation

  • Sang Yong Kim & Richard Staelin, 1999. "Manufacturer Allowances and Retailer Pass-Through Rates in a Competitive Environment," Marketing Science, INFORMS, vol. 18(1), pages 59-76.
    • Handle: RePEc:inm:ormksc:v:18:y:1999:i:1:p:59-76
    DOI: 10.1287/mksc.18.1.59
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.18.1.59
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mksc.18.1.59?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Peter M. Guadagni & John D. C. Little, 1983. "A Logit Model of Brand Choice Calibrated on Scanner Data," Marketing Science, INFORMS, vol. 2(3), pages 203-238.
    2. S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
    3. Robert C. Blattberg & Richard Briesch & Edward J. Fox, 1995. "How Promotions Work," Marketing Science, INFORMS, vol. 14(3_supplem), pages 122-132.
    4. David R. Bell & Jeongwen Chiang & V. Padmanabhan, 1999. "The Decomposition of Promotional Response: An Empirical Generalization," Marketing Science, INFORMS, vol. 18(4), pages 504-526.
    5. J. Jeffrey Inman & Leigh McAlister, 1993. "A Retailer Promotion Policy Model Considering Promotion Signal Sensitivity," Marketing Science, INFORMS, vol. 12(4), pages 339-356.
    6. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-370, July.
    7. Anil Kaul & Dick R. Wittink, 1995. "Empirical Generalizations About the Impact of Advertising on Price Sensitivity and Price," Marketing Science, INFORMS, vol. 14(3_supplem), pages 151-160.
    8. Eitan Gerstner & James D. Hess, 1995. "Pull Promotions and Channel Coordination," Marketing Science, INFORMS, vol. 14(1), pages 43-60.
    9. Chernev, Alex, 1997. "The Effect of Common Features on Brand Choice: Moderating Role of Attribute Importance," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 23(4), pages 304-311, March.
    10. G. Dekimpe, Marnik & Hanssens, Dominique M. & Silva-Risso, Jorge M., 1998. "Long-run effects of price promotions in scanner markets," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 269-291, November.
    11. Deepak Agrawal, 1996. "Effect of Brand Loyalty on Advertising and Trade Promotions: A Game Theoretic Analysis with Empirical Evidence," Marketing Science, INFORMS, vol. 15(1), pages 86-108.
    12. Rajiv Lal & V. Padmanabhan, 1995. "Competitive Response and Equilibria," Marketing Science, INFORMS, vol. 14(3_supplem), pages 101-108.
    13. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
    14. Inman, J Jeffrey & McAlister, Leigh & Hoyer, Wayne D, 1990. "Promotion Signal: Proxy for a Price Cut?," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 17(1), pages 74-81, June.
    15. Rajiv Lal & Ram Rao, 1997. "Supermarket Competition: The Case of Every Day Low Pricing," Marketing Science, INFORMS, vol. 16(1), pages 60-80.
    16. Steven M. Shugan, 1985. "Implicit Understandings in Channels of Distribution," Management Science, INFORMS, vol. 31(4), pages 435-460, April.
    17. Rajiv Lal & Chakravarthi Narasimhan, 1996. "The Inverse Relationship Between Manufacturer and Retailer Margins: A Theory," Marketing Science, INFORMS, vol. 15(2), pages 132-151.
    18. Abel P. Jeuland & Steven M. Shugan, 1988. "Note—Channel of Distribution Profits When Channel Members Form Conjectures," Marketing Science, INFORMS, vol. 7(2), pages 202-210.
    19. Paul R. Messinger & Chakravarthi Narasimhan, 1995. "Has Power Shifted in the Grocery Channel?," Marketing Science, INFORMS, vol. 14(2), pages 189-223.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michaela Draganska & Daniel Klapper & Sofia B. Villas-Boas, 2010. "A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel," Marketing Science, INFORMS, vol. 29(1), pages 57-74, 01-02.
    2. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.
    3. Tansev Geylani & Anthony J. Dukes & Kannan Srinivasan, 2007. "Strategic Manufacturer Response to a Dominant Retailer," Marketing Science, INFORMS, vol. 26(2), pages 164-178, 03-04.
    4. Minakshi Trivedi, 1998. "Distribution Channels: An Extension of Exclusive Retailership," Management Science, INFORMS, vol. 44(7), pages 896-909, July.
    5. Xie, Jinxing & Wei, Jerry C., 2009. "Coordinating advertising and pricing in a manufacturer-retailer channel," European Journal of Operational Research, Elsevier, vol. 197(2), pages 785-791, September.
    6. Ingene, Charles A. & Taboubi, Sihem & Zaccour, Georges, 2012. "Game-Theoretic Coordination Mechanisms in Distribution Channels: Integration and Extensions for Models Without Competition," Journal of Retailing, Elsevier, vol. 88(4), pages 476-496.
    7. Karray Salma & Martín-Herrán Guiomar, 2008. "Investigating the Relationship Between Advertising and Pricing in a Channel with Private Label Offering: A Theoretic Model," Review of Marketing Science, De Gruyter, vol. 6(1), pages 1-39, August.
    8. Randolph E. Bucklin & Sunil Gupta, 1999. "Commercial Use of UPC Scanner Data: Industry and Academic Perspectives," Marketing Science, INFORMS, vol. 18(3), pages 247-273.
    9. Roman Inderst & Greg Shaffer, 2019. "Managing Channel Profits When Retailers Have Profitable Outside Options," Management Science, INFORMS, vol. 65(2), pages 642-659, February.
    10. K. Sudhir, 2001. "Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer," Marketing Science, INFORMS, vol. 20(3), pages 244-264, October.
    11. Chan, Tat Y. & Narasimhan, Chakravarthi & Yoon, Yeujun, 2017. "Advertising and price competition in a manufacturer-retailer channel," International Journal of Research in Marketing, Elsevier, vol. 34(3), pages 694-716.
    12. David Besanko & Jean-Pierre Dubé & Sachin Gupta, 2005. "Own-Brand and Cross-Brand Retail Pass-Through," Marketing Science, INFORMS, vol. 24(1), pages 123-137, July.
    13. Vrinda Kadiyali & Pradeep Chintagunta & Naufel Vilcassim, 2000. "Manufacturer-Retailer Channel Interactions and Implications for Channel Power: An Empirical Investigation of Pricing in a Local Market," Marketing Science, INFORMS, vol. 19(2), pages 127-148, September.
    14. Lu, Jye-Chyi & Tsao, Yu-Chung & Charoensiriwath, Chayakrit, 2011. "Competition under manufacturer service and retail price," Economic Modelling, Elsevier, vol. 28(3), pages 1256-1264, May.
    15. Vincent R. Nijs & Marnik G. Dekimpe & Jan-Benedict E.M. Steenkamps & Dominique M. Hanssens, 2001. "The Category-Demand Effects of Price Promotions," Marketing Science, INFORMS, vol. 20(1), pages 1-22, September.
    16. Yunchuan Liu & Z. John Zhang, 2006. "Research Note—The Benefits of Personalized Pricing in a Channel," Marketing Science, INFORMS, vol. 25(1), pages 97-105, 01-02.
    17. Eric T. Anderson & Duncan I. Simester, 2004. "Long-Run Effects of Promotion Depth on New Versus Established Customers: Three Field Studies," Marketing Science, INFORMS, vol. 23(1), pages 4-20, February.
    18. Venkatesh Shankar & Ruth N. Bolton, 2004. "An Empirical Analysis of Determinants of Retailer Pricing Strategy," Marketing Science, INFORMS, vol. 23(1), pages 28-49, May.
    19. Greg Shaffer & Florian Zettelmeyer, 2004. "Advertising in a Distribution Channel," Marketing Science, INFORMS, vol. 23(4), pages 619-628, November.
    20. Fabio Caldieraro & Anne T. Coughlan, 2007. "Spiffed-Up Channels: The Role of Spiffs in Hierarchical Selling Organizations," Marketing Science, INFORMS, vol. 26(1), pages 31-51, 01-02.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:18:y:1999:i:1:p:59-76. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.