Executive Summary
Forward buying occurs when retailers purchase units during a particular period, hold some of them in inventory, and then sell them in subsequent periods. Conventional wisdom in marketing suggests that retailer forward buying is a consequence of trade promotions that end up helping the retailer but hurting the manufacturer. This article provides a deeper understanding of forward buying by studying it within the context of manufacturer trade promotions, competition, and demand uncertainty. The authors analyze forward buying with three channel structures: (1) A single manufacturer sells to a single retailer; (2) two competing manufacturers sell through a single, common retailer; and (3) a single manufacturer sells to two competing retailers.
The authors find that regardless of whether the manufacturer offers trade promotions, forward buying can still be an optimal strategy for a retailer. That is, even though a trade promotion increases the level of forward buying, eliminating trade promotions does not mean that forward buying will go away. Importantly, however, forward buying need not always be profitable for retailers. In particular, when two competing retailers purchase from a single manufacturer, competition forces each retailer to pass through more of the wholesale price reductions. This result provides a notable contrast to the belief that though manufacturers are hurt by retailer’s forward buying, they allow this practice because of competitive pressures from other manufacturers. The analysis suggests that the level of retailer competition also drives the extent of forward buying.
The main effect of forward buying is that it results in an overall increase in the purchase order from the retailer. In contrast to the commonly held belief that the manufacturer is hurt by forward buying, the authors show that the manufacturer is better off when the increase in its total sales offsets the reduction in wholesale prices. Importantly, when holding costs are low enough, forward buying by the retailer can benefit the manufacturer and the overall channel. In other words, forward buying potentially can move the channel closer to a coordinated level. This surprising result occurs only when the holding cost inefficiency is offset by a decrease in the double marginalization inefficiency.
Some researchers have argued that manufacturers can be better off by disallowing forward buying during trade promotions. The authors show that such a move can also have other consequences. In particular, if a retailer is disallowed from forward buying, the manufacturer will need to reduce the merchandising requirement associated with the trade promotion; furthermore, this can potentially lead the retailer to reduce its own merchandising effort in subsequent periods where there is no trade promotion. The net effect of disallowing forward buying can be an overall decrease in demand for the product.
Biography
Preyas S. Desai is Professor of Business Administration in the Fuqua School of Business at Duke University. He holds BE and MBA from Gujarat University and an MS and PhD from Carnegie Mellon University. His research interests include marketing strategy, management of distribution channels, and marketing of durable goods. His research on these topics has appeared in journals such as Journal of Marketing Research, Marketing Science, Management Science, and Quantitative Marketing and Economics.
Oded Koenigsberg is Associate Professor of Marketing at Columbia University. He received a BSc in Industrial Engineering and Management from the Technion (Israel Institute of Technology), an MS in Operational Research and Industrial Engineering from Cornell University, and a PhD in Operations Management from Fuqua School of Business at Duke University. He also spent 12 years in industry before pursuing his PhD degree. His research interests focus on modeling the marketing–manufacturing interface and studying problems related to marketing channels, pricing, and inventory. His research has appeared in Quantitative Marketing and Economics, Management Science, and Production and Operations Management.
Devavrat Purohit is Professor of Business Administration in the Fuqua School of Business at Duke University. He received his PhD from the Graduate School of Industrial Administration at Carnegie Mellon University. His research appears in journals such as Quantitative Marketing and Economics Management Science, Marketing Science, Journal of Consumer Research, and Journal of Marketing Research.
Journal of Marketing Research, Volume 47, Number 1, February 2010
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