A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel

  • Draganska M
  • Klapper D
  • Villas-Boas S
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This research aims to provide insights into the determinants of channel
profitability and the relative power in the channel by considering
consumer demand and the interactions between manufacturers and retailers
in an equilibrium model. We use the Nash bargaining solution to determine
wholesale prices and thus how margins are split in the channel. Equilibrium
margins are a function of demand primitives and of retailer and manufacturer
bargaining power. Bargaining power is itself a function of exogenous
retail and manufacturer characteristics. The parties' bargaining
positions are determined endogenously from the estimated substitution
patterns on the demand side. The more they have to lose in a negotiation
relative to an outside option, the weaker the bargaining position.
We use the proposed bargaining model to investigate the role of the
three main factors that have been blamed for the power shift from
manufacturers to retailers in recent years (firm-size increases,
store-brand introductions, and service-level differentiation). In
our empirical analysis of the German market for coffee, we find that
bargaining power varies among the different manufacturer-retailer
pairs. This result suggests that bargaining power is not an inherent
characteristic of a firm but rather depends on the negotiation partner.
We are able to confirm empirically previous theoretical findings
that there can be cases where the slice of the pie that goes to one
of the channel members may decrease, but the overall pie increases
and compensates for the smaller share of profits.

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  • Michaela Draganska

  • Daniel Klapper

  • Sofia B. Villas-Boas

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