The Impact of Manufacturers' Wholesale Prices on a Retailer's Shelf-Space and Pricing Decisions

This article examines shelf-space allocation and pricing decisions in the marketing channel as the results of a static game played à la Stackelberg between two manufacturers of competing brands and one retailer. The competing manufacturers act as leaders that play a simultaneous and noncooperative game. They fix their transfer prices by taking into account the shelf-space allocation and price-markup decisions of their common exclusive dealer. The results indicate that the wholesale prices of brands are strongly linked to their share of the shelf. The main results of our numerical simulations may be summarized as follows: first, the lower the unit cost and/or the greater the price elasticity, the greater the shelf space allocated to that brand. Second, the higher the shelf-space elasticity, the lower are the wholesale prices and the profits of all channel members. Subject Areas: Distribution Channels, Game Theory, Pricing, Shelf-Space Allocation, and Stackelberg Equilibrium.