Distribution Channels, Uncertain Cost and Information

Abstract

This paper discusses the channel selection or exclusive contracts of trading companies under cost uncertainty. An exclusive contract is a basic contract concluded by a trading company as an importer with a specific manufacturer. The trading company generally uses an exclusive contract to do business with the same subcontracted manufacturer. The verticality that a trading company establishes by concluding an exclusive contract is considered to be an effective contract system to reduce the transaction costs of the trading company.However, the organization of a trading company affected by overseas markets can be regarded as a sort of information system because the company's economic conditions are always uncertain. Most of the preceding studies regarding channel selection under uncertainty assume that economic organizations are not affected by risks and do not think of distributors as risk-averters. This paper assumes that a trading company which pays the importer duties and a manufacturer which purchases production components are both risk-averse. It analyzes why channel selection or exclusive contract of the trading company is constructed in connection with information communication systems. The analysis results are as follows.(i) When comparing an exclusive contract with a nonexclusive contract, the collection of overseas market information by a trading company increase manufacturer's and trading company's expected payoff.(ii) The variance values of the prices of a production components that the trading company purchases and the risk aversion determine whether the trading company should conclude an exclusive contract, i.e., a channel selection.The results obtained from this discussion must be further analyzed in terms of generality. However, they are considered to give an interesting suggestion when studying exclusive contracts of trading companies in management history.