Do Strategic Conclusions Depend on How Price is Defined in Models of Distribution Channels?

Journal of Marketing Research, 2005

Rajeev K. Tyagi

Abstract

Models of distribution channels have defined retailer and manufacturer pricing decision variables in different ways, such as absolute retail price or absolute retail margin and absolute manufacturer price or absolute manufacturer margin. This paper examines if this choice of definition affects the equilibrium outcomes from such models. It shows that the equilibrium outcomes do not change with these definitions if the manufacturers are modeled as Stackelberg pricing leaders to their retailer. However, if the manufacturers are modeled (i) as Bertrand-Nash competitors to their retailer, or (ii) as Stackelberg pricing followers to their retailer, then the equilibrium outcomes change depending on how one defines retailerís pricing decision variables. Moreover, if, in these two cases, manufacturers and retailer are themselves allowed to define their pricing decision variables, then (i) the manufacturers are indifferent between choosing absolute prices, absolute margins, and percentage margins, but (ii) the retailer chooses percentage margins. These results have implications for both theoretical and empirical models of price competition in distribution channels.

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