Delegated bargaining in distribution channels

Abstract

In this paper we analyse a two-manufacturer two-agent model in which manufacturers delegate sales and price negotiations to exclusive, separate, and independent agents. Manufacturers first choose a pricing arrangement (two-part tariff versus linear tariff) and then set wholesale prices to their agents. Given this, agents advertise prices to consumers as a basis for negotiations. Finally, consumers make their buying decision and bargain about the actually paid price once they arrive at an agent’s location. We show that both franchise pricing and linear pricing can be supported as equilibrium outcomes depending on the agents’ fixed costs and consumer bargaining power. It is shown that consumers may be worse off from the ability to bargain and more so the higher their bargaining power. The latter is true if wholesale prices are ex ante unobservable and manufacturers use two-part tariffs. In the case of linear pricing, consumers gain from the ability to bargain and more so the higher bargaining power they have. On the balance, however, consumers are worse off from higher bargaining power due to the fact that increasing bargaining power affects manufacturer equilibrium strategies: they switch from two-part tariffs to linear tariffs, which results in a dramatic drop of consumer surplus. Although consumers than benefit from having higher bargaining power, consumer surplus does not exceed the level that would be reached without bargaining. Hence, consumers always lose from negotiating prices with retailers.