Distribution channel strategies in a mixed market

Abstract

This paper studies equilibrium channel strategies in a mixed market with a public firm and a private firm. The public firm is concerned with social welfare, while the private firm aims to maximize its own profit. Each firm decides whether to adopt an integrated or a decentralized channel. We examine two standard market competition modes, Bertrand and Cournot. Within each competition mode, we consider two typical vertical contracts, wholesale-price and two-part tariff contracts. Our results suggest that equilibrium channel structures depend on the market competition mode, the vertical contract form, and the level of product substitutability. Specifically, the channel strategy of the private firm depends mainly on the vertical contract form: under a two-part tariff contract, the private firm always chooses decentralization; under a wholesale-price contract, the private firm chooses integration for most scenarios except for highly substitutable products under Bertrand competition (i.e., under very intense competition). The channel strategy of the public firm depends mainly on the competition mode: under Bertrand competition, the public firm always chooses decentralization; under Cournot competition, the public firm always chooses the opposite of the private firm׳s strategy.