Incorporating balance of power in channel decision structure: Theory and empirical application

Abstract

Abstract The objective of a manufacturer is to maximize the profits of its brands. The retailer, on the other hand, is not interested in the profitability of any particular brand but concentrates on the overall category profit. In spite of these apparently diverging profit objectives, both manufacturers and retailers are increasingly realizing that profit margins for both may be increased when retailers and manufacturers recognize the strengths of each other and utilize them to maximize the overall category profit. We develop a game theoretic model to demonstrate that when the retailer allows a few large manufacturers to practice independent brand management but manages the rest of the brands, the category profit is indeed higher than the profits generated when it allows independent brand management by all manufacturers or acts as an uncompromising category manager. We also provide an empirical application of our model on scanner data.