An Industry Equilibrium Analysis of Downstream Vertical Integration

Abstract

This paper investigates the effect of product substitutability on Nash equilibrium distribution structures in a duopoly where each manufacturer distributes its goods through a single exclusive retailer, which may be either a franchised outlet or a factory store. Static linear demand and cost functions are assumed, and a number of rules about players' expectations of competitors' behavior are examined. It is found that for most specifications product substitutability does influence the equilibrium distribution structure. For low degrees of substitutability, each manufacturer will distribute its product through a company store; for more highly competitive goods, manufacturers will be more likely to use a decentralized distribution system. This article was originally published in , Volume 2, Issue 2, pages 161–191, in 1983.channel management, distribution, vertical integration, industry analysis, game, pricing

Agency Selling or Reselling? Channel Structures in Electronic Retailing

“…We contrast this result with the results in McGuire and Staelin (1983) and Jerath and Zhang (2010). In our case, as competition increases, there is a shift away from reselling and towards agency selling.…”

“…In other words, the decision on the selling format is a longer-term decision than the decision on wholesale price. This timing is also in accordance with modeling choices in previous papers on vertical channel structures, e.g., (McGuire and Staelin, 1983, Moorthy, 1988, Jerath and Zhang, 2010. The following matrix represents the game between the e-tailers in strategic form (where…”

“…In our case, as competition increases, there is a shift away from reselling and towards agency selling. In McGuire and Staelin (1983), where competing manufacturers decide the channel structure, as competition increases, the manufacturers choose reselling (or, in their terminology, vertical separation).…”

“…Our work is also related to the rich stream of literature on the determinants of vertical channel structure (McGuire and Staelin, 1983, Bernheim and Whinston, 1985, Bonanno and Vickers, 1988, Moorthy, 1988, Coughlan and Wernerfelt, 1989. Coughlan and Wernerfelt (1989) and Moorthy (1988) focus on the equilibrium channel structure when the manufacturers are the architects of the channel.…”

Research on Supply Chain Stability Driven by Consumer’s Channel Preference Based on Complexity Theory

“…Here, d i is the market base of channel i, p i is the sales price of retailer i, δ is the price sensitivity of the product, and γ denotes the substitutability of the retailers. In order to discuss the influence of consumer's channel preference and pricing strategies on the performance of the supply chain members without loss of generality, the method proposed by Mcguire and Staelin [21] has been applied to rescale the demand functions in (1). The scaled model can conduct some analytical comparisons instead of numerical experiments reported in Xiao et al [22].…”