Single vs. cross distribution channels with manufacturers’ dynamic tacit collusion

Junsong Bian, Xuan Zhao, Yunchuan Liu

Research output: Contribution to journalArticleResearchpeer-review

Abstract

A manufacturer can choose to distribute its products through one retailer (single distribution) or across multiple retailers (cross distribution). In this paper, we develop a dynamic model to examine the interactions between two manufacturers' distribution channel strategies and their collusion incentives. Contrary to conventional wisdom, we find that single distribution does not always facilitate collusion between the manufacturers and that collusion is only facilitated when both adopt single distribution channels. In other words, an asymmetric cross-distribution channel structure helps to deter upstream collusion. Our results also suggest that retail mergers can hinder upstream collusion. Furthermore, we show that the equilibrium endogenous channel structures crucially depend on the discount factor of future cash flows and the relationship between the manufacturers' products (substitutes vs. complements). Specifically, when the products are highly substitutable, and manufacturers’ value of future cash flow is sufficiently low, the win-win equilibrium channel structure operated by the manufacturers comprises single distribution channels. However, such an equilibrium channel structure hurts consumers and social welfare when compared with cross-distribution channel structures. In all other instances, the win-win equilibrium structure chosen by the manufacturers yields cross-distribution channels, which also benefit consumers and social welfare.

LanguageEnglish
Article number107456
JournalInternational Journal of Production Economics
DOIs
Publication statusE-pub ahead of print - 29 Jul 2019
Externally publishedYes

Fingerprint

Dynamic models
Tacit collusion
Distribution channels
Channel structure
Collusion
Win-win
Cash flow
Consumer welfare
Social welfare
Retailers

Keywords

  • Distribution channel strategies
  • Game theory
  • Product differentiation
  • Supply chain management
  • Tacit collusion

Cite this

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title = "Single vs. cross distribution channels with manufacturers’ dynamic tacit collusion",
abstract = "A manufacturer can choose to distribute its products through one retailer (single distribution) or across multiple retailers (cross distribution). In this paper, we develop a dynamic model to examine the interactions between two manufacturers' distribution channel strategies and their collusion incentives. Contrary to conventional wisdom, we find that single distribution does not always facilitate collusion between the manufacturers and that collusion is only facilitated when both adopt single distribution channels. In other words, an asymmetric cross-distribution channel structure helps to deter upstream collusion. Our results also suggest that retail mergers can hinder upstream collusion. Furthermore, we show that the equilibrium endogenous channel structures crucially depend on the discount factor of future cash flows and the relationship between the manufacturers' products (substitutes vs. complements). Specifically, when the products are highly substitutable, and manufacturers’ value of future cash flow is sufficiently low, the win-win equilibrium channel structure operated by the manufacturers comprises single distribution channels. However, such an equilibrium channel structure hurts consumers and social welfare when compared with cross-distribution channel structures. In all other instances, the win-win equilibrium structure chosen by the manufacturers yields cross-distribution channels, which also benefit consumers and social welfare.",
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Single vs. cross distribution channels with manufacturers’ dynamic tacit collusion. / Bian, Junsong; Zhao, Xuan; Liu , Yunchuan.

In: International Journal of Production Economics, 29.07.2019.

Research output: Contribution to journalArticleResearchpeer-review

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