Common Retailer Channel Revisited: The Role of Supply Network Size

Abstract

This paper is motivated by the ubiquitous practical existence of common retailer distribution channels (e.g., a grocery store offering multiple brands of the same product). Demand interdependence (product substitutability) among various brands is critical and thus we investigate its impact on firms’ profits. Using an economic framework with manufacturers operating as Stackelberg leaders, our analysis reveals unique and substantive insights dependent on the underlying market demand structure, and in some cases, the extent of supply coverage. For the Spence-Dixit-Vives demand structure, we find that competing manufacturers prefer to offer brands with low levels of substitutability while retailer’s preferences are moderated by the interaction effect between the number of competing brands and level of product substitutability (essentially the retailer prefers high levels of substitutability when the number of brands is “small,” and vice versa). For the Shubik-Levitan demand structure, manufacturers may prefer high or low levels of product substitutability depending on the extent of supply coverage while the retailer always prefers high levels of product substitutability. These findings offer useful prescriptions for category management and persuasive advertising.

Keywords: channel; retailing; product substitutability; upstream competition; supply coverage