Anthony J. Dukes

Channel Bargaining with Retailer Asymmetry

Manufacturers of consumer products often complain of lower profits in light of the growing channel dominance of retailers such as Wal-Mart, Home Depot, and other “power retailers.” The authors argue that this complaint might not be valid. In an analytical model of competing manufacturers and competing multiproduct retailers, the authors show that manufacturers may actually experience increased profits when a retailer gains an exogenous cost advantage over its rival retailer. Potential channel efficiencies exist when retailing costs are reduced. The authors illustrate that channel transactions based on bilateral bargaining capture these efficiencies by transferring market share to the more efficient retailer, thus increasing channel profits. In a bargaining relationship between a manufacturer and a retailer, the manufacturer realizes some of these enhanced efficiencies. The authors discuss the managerial implications for pricing in channels.

Information Sharing in a Channel with Partially Informed Retailers

While retailers have sales data to forecast demand, manufacturers have a broad understanding of the market and the coming trends. It is well known that pooling such demand information within a distribution channel improves supply chain logistics. However, little is known about how information-sharing affects wholesale pricing incentives. In this paper, we investigate a channel structure where a manufacturer and two retailers have private signals of the state of the demand. Our model identifies the presence of a pricing distortion, which we term the inference effect, when a manufacturer sets price to an uninformed retailer. Because of this inference effect, the manufacturer would like to set a low wholesale price to signal to the retailer that the demand is low. On the other hand, the manufacturer would like to set a high wholesale price so that he earns the optimal margin on each unit sold. Vertical information sharing benefits the manufacturer by eliminating the distortion caused by the inference effect, which is more profound in a channel whose retailer has a noisier signal. This result implies that when there is a cost associated with transmitting information, the manufacturer may choose to share information with only the less-informed retailer rather than with both.

On the Profitability of Media Mergers

We examine incentives for nonconsolidating horizontal mergers in commercial media industries. In a model with differentiated media and products, we show that such a merger is profitable if merging media firms gain a relative bargaining advantage vis-a-vis advertisers in the negotiations for advertising space. Whether a bargaining advantage yields profitable conditions for a merger depends on the extent of competition for audiences among media firms. Higher levels of competition make media mergers more profitable. This result contrasts those implied by oligopoly models for traditional product markets, which suggest that mergers become less profitable for higher levels of competition.

The End of the Robinson-Patman Act? Evidence from Legal Case Data

The Robinson-Patman Act (RP), an antitrust statute aimed at protecting small businesses, limits price setting in distribution channels. To avoid costly penalties under RP, managers take a variety of precautions when pricing to retailers and wholesalers. But how likely is a court to find a defendant guilty of violating the RP? We find that this likelihood has dropped drastically as a result of recent Supreme Court rulings from more than 1 in 3 before 1993 to less than 1 in 20 for the period 2006--2010. The analysis also points to an increased success of the no harm to competition defense, which reflects the view that the courts have raised the hurdle for plaintiffs to establish competitive harm. Finally, our results indicate that smaller plaintiffs over time have fared worse than larger ones, a trend that challenges the notion that RP protects small businesses.

In-Store Media and Distribution Channel Coordination

We study the effects of retailer in-store media on distribution channel relationships. Retailers open in-store media (ISM) and allow manufacturers to advertise to shoppers. Our results suggest that ISM has an important role in coordinating a distribution channel on advertising volume and product sales, and on mitigating supplier competition. Improved channel coordination is achieved through the internalization of advertising decisions from commercial forms of media (e.g., radio, TV, newspaper). A retailer may strategically subsidize manufacturers for their advertising on ISM. This subsidy is optimal even if ISM is more effective than commercial media. With manufacturer competition, a retailer can strategically use a “competitive premium” to ration excessive advertising between competing suppliers in a category. When manufacturers are asymmetric with preadvertising brand awareness, a retailer has an incentive to price discriminate by charging lower prices to manufacturers whose brand awareness is higher.

Selective Reporting of Factual Content by Commercial Media

The authors study the market for factual content and examine whether competition increases or decreases its provision. Factual content is supplied by commercial media firms, which observe a set of facts depicting the state of the world and selectively decide how to report them. Consumers value content that matches their opinion, which incentivizes media firms to slant their reports by omitting certain facts. Novel features in the authors’ model include consumers’ ability to anticipate the medias incentives for slant and the requirement that all media stances must be supported by facts. Furthermore, consumers find reports with more facts to be more convincing. Despite consumers’ ability to detect slant and their demand for factual support, the research shows that competition results in consumers reading fewer facts and being unable to update their prior beliefs about the state of the world. The authors also find that a monopoly medium may be more polarizing than competitive media and that polarized reporting can be less biased.

The Informational Role of Product Trade‐Ins for Pricing Durable Goods

This research theorizes that sellers of durable goods can utilize inferences about the buyers willingness to pay based not only on her decision to trade in the old good but also on its characteristics. We find empirical support for this theory using transaction data for new car purchases. The results support the notion that dealers infer a higher willingness to pay and charge higher prices to consumers who trade in a used vehicle than to those who do not. We also find that dealers charge even higher prices to those consumers who trade in used cars that are similar to the new one.

Consumer Search with Limited Product Evaluation

Consumers need not evaluate all available product information before making a purchase. This may arise because shopping environments prevent a full evaluation (e.g., online). We develop a model of simultaneous search in which consumers have limited ability in product evaluation in order to study the impact of search cost on prices, consumer surplus, and social welfare. If consumers are endowed with the ability to choose how much information to acquire from a searched product, they may choose limited product evaluation. We find that consumers may evaluate more firms, enjoy lower prices, and higher surplus despite this limited ability. This implies that prices can decrease and consumer surplus can increase in search costs. We then extend our setting to the case of multiproduct firms and find similar effects due to changes in within-firm search costs.

Dominant Retailers and Their Impact on Marketing Channels

This chapter explores the implications of dominant retailers for marketing channels – the system through which manufacturers distribute their products to consumers. The emergence of a few dominant retailers has altered the way in which members of the marketing channel make decisions. The chapter first presents an economic framework to explore the source of retail dominance. It then explores how several key decisions (e.g., product quality and assortment, prices, market data collaboration, advertising) taken within the marketing channel are affected by the dominance of certain retailers. Antitrust implications are also assessed.

Best Practices for Online Procurement Intermediaries

Industrial buyers who seek to procure inputs have the option of contracting the process out to procurement intermediaries. Many of these intermediaries now operate using Internet-based software to enhance the efficiency of their services. We develop a theoretical model of a buyer who wishes to procure an input from one of many differentiated suppliers. The buyer chooses between conducting the procurement herself and hiring a procurement intermediary. We use the model to investigate how and when such procurement intermediaries can be profitable, and to generate insight for the design of the online procurement process with regard to bidder recruitment and information revelation. The model suggests that the profitability of the intermediary relies crucially, on its ability to administer and evaluate quotes from potential suppliers more efficiently than the buyer can herself.