The Impact of Retailers’ Asymmetric Power on Channel Relations

A small number of retailers are determining more and more how consumer products are made and sold in the US. As widely reported in the trade press, these dominant retailers are dictating their terms to the manufacturers while other retailers do not enjoy the same leverage. In this study, we make the distinction between a dominant and a weak retailer, and investigate the dominant retailer/manufacturer/weak retailer channel structure. The major research questions that we try to answer are as follows: How can the manufacturer strategically respond to dominant retailer pricing pressures? Can the manufacturer use policies aimed at the weak retailer to make more profits? How should this response change across different industries? When the manufacturer strategically responds, is there any incentive for the dominant retailer to conceal its demand information? In our theoretical analysis, a dominant and a weak retailer compete for the sale of a single product. The dominant retailer has the power to dictate the wholesale price to the manufacturer, but the manufacturer sets the wholesale price for the weak retailer. The manufacturer also has the ability to transfer demand between the retailers. The analysis reveals that the manufacturer can strategically respond by 1) raising the wholesale price for the weak retailer over that for the dominant retailer to exploit the weak retailer’s loyal customers, and 2) simultaneously transferring demand to the weak retailer, which is the high margin channel for the manufacturer. For example, the manufacturer, while raising the wholesale price for the weak retailer, can engage in collaborative advertising with the weak retailer to transfer demand from the dominant retailer to the weak retailer. This response shifts some of the channel profits from the dominant retailer to the manufacturer. Moreover, we find that the dominant retailer has an incentive to conceal its demand information. When the dominant retailer does not share its demand information, the manufacturer cannot effectively implement its strategic response. This ineffective manufacturer response alters the distribution of the channel profits in favor of the dominant retailer. * Contact information: [email protected], Tansev Geylani, Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA 15213.