Determinants of Margins in the Distribution Channel: An Empirical Investigation

Abstract

In this paper we describe how margins in the channel vary over time within a product category and identify the market, manufacturer, and retailer characteristics that explain this variation. To obtain the equilibrium margins, we explicitly model the behavior of the various agents in the marketplace. Because the behavior of the agents changes in response to changes in the economic environment, we observe shifts in the total channel margins and the way they are split between the channel members. We explain this variation by examining the impact of directly measurable factors on total margins in the distribution channel and the share of these margins that manufacturers and retailers obtain. We illustrate the proposed approach using data for the ground coffee category in Germany. Our empirical analysis demonstrates that while the market-level factors affect total margins in the channel, size and other characteristics of manufacturers and retailers have a larger impact on the way margins are split. Our findings have immediate implications for the product portfolios offered by manufacturers, the positioning of store brands, and the retail service level.