Ganesh Iyer

A bargaining theory of distribution channels

A critical factor in channel relationships between manufacturers and retailers is the relative bargaining power of both parties. In this article, the authors develop a framework to examine bargaining between channel members and demonstrate that the bargaining process actually affects the degree of coordination and that two-part tariffs will not be part of the market contract even in a simple one manufacturer-one retailer channel. To establish the institutional and theoretical bases for these results, the authors relax the conventional assumption that the product being exchanged is completely specifiable in a contract. They show that the institution of bargaining has force, and it affects channel coordination when the complexity of nonspecifiability of the product exchange is present. The authors find that greater retailer power promotes channel coordination. Thus, there are conditions in which the presence of a powerful retailer might actually be beneficial to all channel members. The authors recover the standard double-marginalization take-it-or-leave-it offer outcome as a particular case of the bargaining process. They also examine the implications of relative bargaining powers for whether the product is delivered “early” (i.e., before demand is realized) or “late” (i.e., delivered to the retailer only if there is demand). The authors present the implications for returns policies as well as of renegotiation costs and retail competition.

Price Competition Under Stockpiling and Flexible Consumption

Conventional wisdom suggests that the main effect of price promotion is on brand switching (i.e., secondary demand); however, some recent studies demonstrate that the primary demand expansion effect can be considerably larger than previously believed. A significant driver of this primary demand effect is consumer stockpiling in response to price promotions. Indeed, experimental studies have shown that additional inventory on hand can lead to an endogenous increase in consumption. The authors develop a model of price competition between firms in response to the stockpiling and subsequent consumption dynamics of consumers. In this setting, the flexible consumption effect causes more intense price competition, deeper promotions, and an increase in the frequency of promotions. The authors use two years of scanner panel data from eight product categories and 4313 stockkeeping units to test three implications of the theoretical model; they find strong support for each.

Information Acquisition and Sharing in a Vertical Relationship

Manufacturers can acquire consumer information in a sequential manner and influence downstream retail behavior through sharing the acquired information. This paper examines the interaction between a manufacturers optimal information acquisition and sharing strategies in a vertical relationship, capturing the impacts of both the flexibility to sequentially control information collection and the flexibility in ex post voluntary sharing. We show that when information acquisition is sequential, the manufacturer may not acquire perfect information even if it is costless to do so. This self-restriction in information acquisition follows from the manufacturers motivation to strategically influence retail behavior. When information acquisition is inflexible and constrained to be either zero or perfect information, the manufacturer acquires less more information under mandatory voluntary sharing. Moreover, voluntary sharing unambiguously leads to more information being generated, because the manufacturer has the option to strategically withhold the acquired information that turns out to be unfavorable. Finally, the conditions under which the manufacturer ex ante prefers a particular sharing format are examined.

Limited Memory, Categorization, and Competition

This paper investigates the effects of a limited consumer memory on the price competition between firms. It studies a specific aspect of memory---namely, the categorization of available price information that the consumers may need to recall for decision making. This paper analyzes competition between firms in a market with uninformed consumers who do not compare prices, informed consumers who compare prices but with limited memory, and informed consumers who have perfect memory. Consumers, aware of their memory limitations, choose how to encode the prices into categories, whereas firms take the limitations of consumers into account in choosing their pricing strategies. Two distinct types of categorization processes are investigated: (1) a symmetric one in which consumers compare only the labels of price categories from the competing firms and (2) an asymmetric one in which consumers compare the recalled price of one firm with the actual price of the other. We find that the equilibrium partition for the consumers calls for finer categorization toward the bottom of the price distribution. Thus consumers have a motivation to invest in greater memory resources in encoding lower prices to induce firms to charge more favorable prices. The interaction between the categorization strategies of the consumers and the price competition between the firms is such that small initial improvements in recall move the market outcomes quickly toward the case of perfect recall. Even with few memory categories, the expected price consumers pay and their surplus is close to the case of perfect recall. There is thus a suggestion in this model that market competition adjusts to the memory limitations of consumers.

Information and Inventory in Distribution Channels

We examine the trade-offs between demand information and inventory in a distribution channel. While better demand information has a positive direct effect for the manufacturer in improving the efficiency of holding inventory in a channel, it can also have the strategic effect of increasing retail prices and limiting the extraction of retail profits. Having inventory in the channel can help the manufacturer to manage retail pricing behavior while better extracting retail surplus. Thus, even if the information system is perfectly reliable, the manufacturer might not always want to institute an information-enabled channel over a channel with inventory. We show this first in a channel with a single retailer, where the channel with perfect information is preferred over the channel with inventory only if the marginal cost of production is sufficiently high. We also analyze a channel with an imperfectly reliable information system and find that if the manufacturer were to choose the precision of the demand information system, it might not prefer perfect information, even if such information was costless to acquire. In a channel with competing retailers, the channel with perfect information is preferred when retail competition is sufficiently intense. Thus, the presence of inventory can play a role in managing competition among retailers and in helping the manufacturers to appropriate surplus especially when retailers are sufficiently differentiated.

Planned versus Actual Betting in Sequential Gambles

Anecdotal evidence indicates that in a gambling environment, consumers may end up betting more than they had initially planned. The authors assess this phenomenon in a series of three experiments, in which people are exposed to sequential and fair gambles in a two-stage process (planned and actual bets). The results show that in the planning phase, people behave conservatively, betting on average less after an anticipated loss and the same amount after an anticipated gain. However, after experiencing an actual loss in the first gamble, people bet in a subsequent gamble significantly more than they had initially planned, whereas on average, there were no observable differences from the plan after an actual gain. The reason for such asymmetry is due in part to peoples tendency to underestimate, at the planning phase of the gamble, the impact of negative emotions in betting decisions during the actual phase of the gamble.

Multilateral Bargaining and Downstream Competition

We examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers. In these relationships the negotiations are interdependent, and bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices and profitability are similar, and sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price and exclusively supply only the retailer who charged a relatively high retail price and maintained high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition.

To Price Discriminate or Not: Product Choice and the Selection Bias Problem

In this paper, we investigate a gasoline stations incentive to price-discriminate by selling full-service gasoline as well as self-service gasoline. Unlike previous research, we explicitly model a firms incentive to price discriminate by choosing to be either single-product or multi-product as a function of market and station characteristics. This allows us to make two contributions to research in the area: First, we highlight the importance of accounting for self-selectivity considerations that can arise in an empirical analysis of price discrimination that is based on market data. Second, we are able to show how the product and pricing choices of firms depend upon the market characteristics.Using cross-sectional survey data on prices, station and market characteristics for 198 gasoline stations in the Greater Saint Louis area, we estimate a switching regression model of station decisions. Specifically, we employ a binary probit framework that models a stations decision to price-discriminate through the choice of the station-type as a function of market and station characteristics. We then estimate conditional linear regressions with self-selectivity corrections for the stations choice of prices. We show that incorrect inferences about the incentive to price discriminate and about the differences in the prices charged between single-product and multi-product stations would result if the endogeneity in the choice of the station-type were ignored in the estimation. The empirical analysis shows that a larger income spread in the market implies a greater likelihood of the gasoline station being multi-product. In addition, we have support for the various within firm and across firm price differentials as predicted by the theory of price discrimination.

Competition in Consumer Shopping Experience

This paper analyzes the competitive role of retail shopping experience in markets with consumer search costs. We examine how a retailers advantage in providing consumer shopping experience affects its equilibrium pricing and price advertising strategies. We find that if the consumer valuation of a shopping experience is sufficiently low, its effect on retailer strategy is similar to that of quality, and the retailer with the advantage in shopping experience then deploys higher levels of price advertising. On the other hand, when the shopping experience is valuable enough for consumers, it acts akin to price advertising in that it makes it optimal for the retailer with the advantage in shopping experience to eschew price advertising. The optimal competitive investments in consumer shopping experience can be higher than that of a monopoly. The profit impact of shopping experience for a retailer depends on the level of shopping experience: for low levels, the profit impact depends on the difference in the levels between the retailers, but for high enough levels, it depends only on whether the retailers shopping experience level is higher than that of its competitor. In this case, even small differences in shopping experience levels can result in large differences in equilibrium profits.

Social Responsibility and Product Innovation

This paper examines the incentives of firms to invest in socially responsible product innovations. Our analysis connects the existence of socially responsible innovations to the presence of intrinsic and extrinsic social responsibility preferences. In addition to deriving economic value from the product, consumers have heterogeneous intrinsic needs to consume products that are socially responsible. They also have extrinsic social comparison preferences that are based on their meetings with others in social interactions. The frequency of these meetings are endogenous to the consumption choices of consumers. A consumer enjoys a social comparison benefit if her consumption decision is more socially responsible than the consumer that she meets in a social interaction and a social comparison cost if it is less socially responsible.The analysis reveals a nonmonotonic effect of social comparison effects on innovation incentives. When the economic value of a product is relatively small, the incentive to innovate decreases as social comparison effects increase. By contrast, when the economic value of a product is sufficiently large, increases in social comparison effects increase the incentive to innovate. Social comparison benefits and costs have different effects on competition between firms. In particular, social comparison benefits soften price competition, whereas social comparison costs tend to exacerbate price competition. We also identify market conditions where a monopoly invests more or less compared to a firm facing competition.