Boiling frogs: Pricing strategies for a manufacturer adding a direct channel that competes with the traditional channel (original) (raw)
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In this paper, we analyze a scenario where a manufacturer with a traditional channel partner (i.e., a retailer) opens up a direct Internet channel that is in competition with the traditional channel partner. We first consider that in order to mitigate channel conflict the manufacturer, who chooses wholesale prices as a Stackelberg leader, commits to setting a direct channel retail price that matches the retailer's price in the traditional channel. Under this general equal-pricing strategy, we determine the effect of more specific pricing strategies on prices and profits of the manufacturer and the retailer. These specific strategies are: (1) keep wholesale prices as they were before, (2) keep retail prices as they were before, or (3) select wholesale and retail prices that optimize profits for the manufacturer. Within these strategies we identify and summarize cases when the resulting prices are lower than the pre-Internet prices, and when they are higher, relating them to the respective channel costs and to the relative convenience to the consumer of the Internet channel. We find that Strategy 3-the specific equal-pricing strategy that optimizes profits for the manufacturer-often is also preferred by the retailer and customers (through lower prices) over the other equal-pricing strategies. We next consider the implications of the equal-pricing constraint through a numerical experiment that indicates that the equal-pricing strategy is appropriate as long as the Internet channel is significantly less convenient than the traditional channel. If the Internet channel is of comparable convenience to the traditional channel, then the manufacturer has tremendous incentive to abandon the equal-pricing policy-at great peril to the traditional retailer.
Pricing Outcomes in Dual-Channel Monopoly and Partial Duopoly
Modelling and Analysis of Enterprise Information Systems
In this chapter, the authors first study the pricing strategies of a monopolist selling a product through stores in two channels, but under single management (or coordinated management) and then propose a framework for a model for a partial duopoly market conditions. The authors find that the monopolist generally charges a higher price in the brick and mortar store than the price charged in the Internet store. If, however, there is a sufficiently large fraction of buyers who would strictly prefer to buy the product from the Internet store instead of the physical store at any given price, the monopolist might charge the same price in both the stores. The authors also find that physical store price of a dual-channel monopoly is higher than the physical store price of a single-channel monopoly; the price charged in the Internet store is generally lower than the single channel monopoly price. This chapter concludes with an identification of parameters for channel pricing strategies unde...
Channel Bargaining with Retailer Asymmetry
Journal of Marketing Research, 2006
Manufacturers of consumer products often complain of lower profits in light of growing channel dominance of "power retailers". This complaint might not be valid. An analytical model of competing manufacturers and multi-product retailers, might see manufacturers'
Manufacturer-Optimal Wholesale Pricing When Retailers Compete
Marketing Letters - MARK LETT, 1998
The existing marketing science literature on channels of distribution has emphasized pricing strategies that maximize either channel or manufacturer margin. This emphasis has implicitly assumed that optimal wholesale prices are independent of any fixed fees charged by the manufacturer. While this assumption is justified in a single-manufacturer, single-retailer world, it generally does not lead to manufacturer profit maximization in a world of competing retailers. In this paper we derive a manufacturer-optimal wholesale pricing strategy by simultaneously determining both elements of a two-part tariff (consisting of a wholesale price and a fixed fee). We show that the manufacturer will always prefer this “sophisticated” pricing strategy to one that maximizes either channel or manufacturer margin. We also show that both elements of the optimal tariff are functions of the absolute difference between retailer fixed costs.
Handbook of Pricing Research in Marketing, 2009
This chapter provides a critical review of research on pricing within a channel environment. We fi rst describe the literature in terms of increasing time horizons of decision-making in a channel setting: (1) retail pass-through (2) pricing contracts and (3) channel design, all of which occur within a given market environment. We then describe the emerging empirical literature on structural econometric models of channels and its use in (1) inferring channel participant behavior and (2) policy simulations in a channel setting. We also discuss potential areas for future research in each area. * We thank the editor Vithala Rao and Jiwoong Shin for comments and suggestions on the chapter.
“Call for Prices”: Strategic Implications of Raising Consumers' Costs
Marketing Science, 2010
M any consumer durable retailers often do not advertise their prices and instead ask consumers to call them for prices. It is easy to see that this practice increases the consumers' cost of learning the prices of products they are considering, yet firms commonly use such practices. Not advertising prices may reduce the firm's advertising costs, but the strategic effects of doing so are not clear. Our objective is to examine the strategic effects of this practice. In particular, how does making price discovery more difficult for consumers affect competing retailers' price, service decisions, and profits? We develop a model in which a manufacturer sells its product through a high-service retailer and a lowservice retailer. Consumers can purchase the retail service at the high-end retailer and purchase the product at the competing low-end retailer. Therefore, the high-end retailer faces a free-riding problem. A retailer first chooses its optimal service levels. Then, it chooses its optimal price levels. Finally, a retailer decides whether to advertise its prices. The model results in four structures: (1) both retailers advertise prices, (2) only the low-service retailer advertises price, (3) only the high-service retailer advertises price, and (4) neither retailer advertises price. We find that when a retailer does not advertise its price and makes price discovery more difficult for consumers, the competition between the retailers is less intense. However, the retailer is forced to charge a lower price. In addition, if the competing retailer does advertise its prices, then the competing retailer enjoys higher profit margins. We identify conditions under which each of the above four structures is an equilibrium and show that a low-service retailer not advertising its price is a more likely outcome than a high-service retailer doing so. We then solve the manufacturer's problem and find that there are several instances when a retailer's advertising decisions are different from what the manufacturer would want. We describe the nature of this channel coordination problem and identify some solutions.
Exploiting the opportunities of internet and multi-channel pricing: an exploratory research
Journal of Product & Brand …, 2004
Smart firms are not worried about the impact of the Internet on pricing, but realise that they have the unique opportunity to exploit new options and improve their marketing performance. Multi-channel pricing is one of the most interesting opportunities firms can exploit in the digital economy. Reviews the existing literature on pricing on the Internet and on multi-channel pricing. Presents the results of an exploratory research on price opportunities perceived by firms. Offers a picture of the possible multi-channel options available to firms and highlights the importance of the value for and of the customer.
Pricing and channel strategies are important for all organizations. Marketers must assist in putting together the right strategies to help organizations meet and exceed goals. Pricing plays a significant role in what consumers purchase or not purchase. Using different channels to sell an organizations goods or services helps that team maximize their revenues. This paper will discuss distribution strategies, dynamic pricing, and channel pricing.
Coordination and manufacturer profit maximization: The multiple retailer channel
Journal of Retailing, 1995
This paper explores wholesale pricing behavior within a two-level vertical channel consisting of a manufacturer selling through multiple independent retailers. The introduction of multiple retailers is important for several reasons. These include: (I) the determination of optimal channel breadth: (2) an analysis of the optimality of channel coordination for all channel members; and (3) the determination of the distribution of each dyad's profits between manufacturer and retailer. The authors demonstrate the existence of a two-part tariff wholesale pricing policy, common to all retailers, that fully coordinates the channel. They then show that the manufacturer can generally obtain greater pro@ by setting a unique two-part tariff pricing-policy that does not coordinate the channel. Finally, the authors show that the fured-fee component of either two-part tariff determines channel breadth, that is, the number of profit-maximizing independent retailers that are willing to participate in the channel.
Advertising and price competition in a manufacturer-retailer channel
ELSEVIER, 2017
We investigate how manufacturers' advertising competition, when advertising has a dynamic impact on the goodwill that affects market demand, interacts with the price competition in a manufacturer-retailer channel. Specifically, we examine the strategic choices made by manufacturers, the role of the retailer in exacerbating or mitigating competition among manufacturers, the total channel profit and how that is split among the different players. Using prices, sales, and advertising data in the laundry detergent category we find that advertising and pricing are strategic complements as manufacturer advertising increases the price elasticity of demand; advertising competition intensifies price competition but it also improves the profitability of manufacturers; the presence of retailers in the channel leads to increased advertising spending while mitigating the extent of price competition. Manufacturers can enjoy a higher profit from using retailers when they compete in both price and advertising. Finally, we show that the emergence of ecommerce, which enables manufacturers directly selling to end consumers, has asymmetric profit impacts on manufacturers, as brands with lower cost and lower brand goodwill are more benefited from ecommerce.