Do Strategic Conclusions Depend on How Price Is Defined in Models of Distribution Channels?
Published 5/1/2005
Author: Rajeev K. Tyagi
View this content
Executive Summary
Analytical models of distribution channels have defined retailers’ and manufacturers’ pricing-decision variables in different ways, such as absolute retail price or absolute retail margin and absolute manufacturer price or absolute manufacturer margin. This article examines if this choice of definition affects the outcomes from such models. The author shows that the outcomes do not change with these definitions if manufacturers are modeled as Stackelberg pricing leaders to their retailer. However, if manufacturers are modeled (1) as Bertrand-Nash competitors to their retailer or (2) as Stackelberg pricing followers to their retailer, then the outcomes change depending on how the retailer’s pricing-decision variables are defined. Moreover, if in these two cases manufacturers and the retailer are allowed to define their own pricing-decision variables, then (1) manufacturers are indifferent between choosing absolute prices, absolute margins, and percentage margins, but (2) the retailer chooses percentage margins.
Thus, there is an important difference between the definitions of manufacturers’ and retailers’ pricing-decision variables: although the definitions of manufacturers’ pricing-decision variables (i.e., absolute prices, absolute margins, or percentage margins) do not affect the optimal prices and profitability of any channel members, the corresponding definitions of the retailer’s pricing decision variables can significantly affect the optimal prices and profitability of all channel members. Furthermore, if the channel members are allowed to define their own pricing-decision variables, then the retailer always prefers, at least weakly, to use percentage retail margins. Notably, there is lot of empirical evidence that suggests that retailers across industries indeed commonly use percentage retail margins as their pricing-decision variables.
Biography
Rajeev K. Tyagi is an associate professor at Graduate School of Management at the University of California, Irvine. He received his doctoral degree from the Wharton School, University of Pennsylvania, in 1996. He is interested in mathematical modeling of marketing problems and has published in Marketing Science, Management Science, Journal of Marketing Research, Journal of Business, Journal of Industrial Economics, and Economics Letters.
J Marketing Research, Volume 42, Number 2, May 2005
View Table of Contents.