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

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. In a departure from the standard empirical channel literature, which assumes that manufacturers set wholesale prices unilaterally, we explicitly model the negotiations between manufacturers and retailers. To this end, we formulate a Nash bargaining game to determine wholesale prices and thus how margins are split in the channel. Equilibrium margins are thus a function of demand primitives and of retailer and manufacturer bargaining power. Bargaining power is itself a function of exogenous retail and manufacturer characteristics such as firm size and service level. The parties’ bargaining positions are determined endogenously from the estimated substitution patterns on the demand side. Applying our model to the German ground coffee industry, we find that size is a key driver of bargaining power. We conclude that the growth of retailers over the past decade may indeed have strengthened their hand. A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel Michaela Draganska Stanford University Graduate School of Business Stanford, CA 94305-5015 draganska [email protected] Daniel Klapper Johann Wolfgang Goethe-Universität Frankfurt Professur für Konsumgütermarketing D-60325 Frankfurt am Main [email protected] Sofia B. Villas-Boas University of California, Berkeley Department of Agricultural and Resource Economics Berkeley, CA 94720-3310 [email protected] 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. In a departure from the standard empirical channel literature, which assumes that manufacturers set wholesale prices unilaterally, we explicitly model the negotiations between manufacturers and retailers. To this end, we formulate a Nash bargaining game to determine wholesale prices and thus how margins are split in the channel. Equilibrium margins are thus a function of demand primitives and of retailer and manufacturer bargaining power. Bargaining power is itself a function of exogenous retail and manufacturer characteristics such as firm size and service level. The parties’ bargaining positions are determined endogenously from the estimated substitution patterns on the demand side. Applying our model to the German ground coffee industry, we find that size is a key driver of bargaining power. We conclude that the growth of retailers over the past decade may indeed have strengthened their hand.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. In a departure from the standard empirical channel literature, which assumes that manufacturers set wholesale prices unilaterally, we explicitly model the negotiations between manufacturers and retailers. To this end, we formulate a Nash bargaining game to determine wholesale prices and thus how margins are split in the channel. Equilibrium margins are thus a function of demand primitives and of retailer and manufacturer bargaining power. Bargaining power is itself a function of exogenous retail and manufacturer characteristics such as firm size and service level. The parties’ bargaining positions are determined endogenously from the estimated substitution patterns on the demand side. Applying our model to the German ground coffee industry, we find that size is a key driver of bargaining power. We conclude that the growth of retailers over the past decade may indeed have strengthened their hand.