The Changing Face of Distribution Channels: Partial Forward Integration and Strategic Investments

Abstract

Recent years have seen a drastic transformation in the organization of wholesale and retail markets. Where once clear distinctions between wholesale suppliers and retail competitors existed, now an era of blurring boundaries has emerged. This transformation has been marked by the introduction of online channels for suppliers to provide products directly to consumers while, at the same time, traditional retailers too persist. Thus, retailers are both wholesale customers and retail competitors of many manufacturers. The consequences of the rapid emergence of instances of such partial forward integration by suppliers are not yet fully known. To this end, we study how partial forward integration can affect competing firms' strategic investments. We find that integration shifts the environment from being one in which firms invest to undercut retail rivals to one in which firms invest more in boosting demand, even that of their competitors. A case in point is the tendency for a manufacturer to invest broadly in brand promotion (benefiting both itself and its retail competitor), rather than heavy promotion of its own sales channel. The shift in the nature of strategic investments arising from partial forward integration implies that such integration can benefit firms and consumers alike, even the firm which finds itself reliant on a competitor for supplies.