Game-Theoretic Coordination Mechanisms in Distribution Channels: Integration and Extensions for Models Without Competition

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A significant game-theoretic literature on the coordination of distribution channels has developed over the past three decades. We provide an extensive analysis of an important subset of this literature, channels without competition. We review four major models that build on the initial work of Jeuland and Shugan (1983) – who developed a quantity-discount schedule that induces channel members to set price and MM–variables (non-price, marketing-mix variables) at channel-coordinating levels. Moorthy (1987) criticized their schedule’s complexity, arguing for a simpler wholesale contract that induces coordination by avoiding double marginalization.

Our focus is on coordinating mechanisms that enable decentralized channels to replicate an integrated channel’s performance. To ascertain the complexity required for coordination, we build a general model that can be adapted to different channel structures. We employ every two-part tariff embedded in the Jeuland-Shugan schedule; and, we offer an original disquisition on how MM–variables affect the wholesale- price contract needed for coordination. We find that:

  1. The impact of MM–variables on coordination pivots on which channel level provides them and whether their impact on sales is dyad-specific or multi-dyadic.
  2. Coordination requires non-zero margins for all channel members when both channel levels have MM–variables.
  3. In a multi-dyadic channel, there are MM–combinations that a Jeuland-Shugan schedule cannot coordinate.
  4. Coordination may be incompatible with Pareto optimality, even without MM–variables.
In addition, we create an original wholesale-price schedule that coordinates every channel structure/MM–combination. The Jeuland-Shugan schedule is a special case of our schedule.

, 37 pages

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Game-theoretic coordination mechanisms in distribution channels: Integration and extensions for models without competition
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Journal of Retailing, 88(4), 476–496, 2012 BibTeX reference