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

Abstract

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 manufacturerretailer 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.

Financial Dependence, Lean Inventory Strategy, and Firm Performance

“…As noted by Draganska, Klapper and Villas‐Boas (), the bargaining power of a firm is not a fundamental characteristic, but instead is a dyadic measure that varies depending on the party with whom they are negotiating. To fully consider the dyadic nature of power, we also must consider the degree to which a buyer firm is dependent on its suppliers.…”

Are Supermarkets Squeezing Small Suppliers? Evidence from Negotiated Wholesale Prices

“…The closest article to ours is Draganska et al . () who study profit‐sharing in the German coffee market and find that bargaining power lies primarily with the manufacturers. However, a disadvantage of their approach is that they need to rely on a structural model to infer wholesale prices as do most of the articles on vertically organised industries (Sudhir, ; Villas‐Boas, ; Bonnet and Dubois, ) .…”

Information Asymmetry, Manufacturer–retailer Contracts, and Two‐sided Entry

“…Draganska et al. () extend this framework by proposing a Nash bargaining model to determine wholesale prices and how margins are split in the retail channel. With a similar approach, Crawford and Yurukoglu () use a bilateral oligopoly bargaining model to help estimate input costs of distributors in the multichannel television market and conduct counterfactual experiments to compare the welfare implications of à la carte and bundling pricing.…”