Estimating Bargaining Games in Distribution Channels

The issue of power in distribution channels remains a topic of interest among both practitioners and researchers of marketing. This interest has, no doubt, been fueled by the growing power of retailers and the emergence of retail powerhouses such as Walmart. Power, in a distribution channels context, is often de…ned as the ability to appropriate a larger share of the total channel surplus. In a simple manufacturer-retailer setting wholesale prices determine the pro…t share a given channel member appropriates and consequently, power is directly related to the process of wholesale price setting. In most previous studies of channel interactions, it is assumed that the wholesale price is set by the manufacturer unilaterally, i.e. the manufacturer makes a take-it or leave-it o¤er to the retailer. A few notable exceptions are the theoretical works of Villas Boas and Iyer (2002) and Sha¤er and O’Brien (2004) who examine channel relations and price setting in a formal bilateral bargaining framework. There is also enough anecdotal evidence to suggest that wholesale prices are indeed set via a bargaining process rather than by unilateral mandates issued by manufacturers. This paper relies on Nash bargaining theory to propose and implement an econometric framework to investigate channel structure and power. In a supermarket/retail store setting, we assume that the wholesale prices are negotiated between competing manufacturers and a common retailer. We model the negotiation process using a modi…ed Nash bargaining framework with asymmetric bargaining powers. The wholesale prices that emerge as an outcome of the bargaining process are a function of anticipated pro…ts and relative bargaining powers. The theoretical solution suggests that gains from trade be split in proportion to the bargaining powers of the trading parties. We contrast our proposed model with some of the standard models used in the Empirical Industrial Organization literature (e.g. Manufacturer Stackelberg) by calibrating each model to data from two di¤erent product categories. We …nd that in terms of …t, our proposed model performs better than extant models of channel interactions and hence provides empirical evidence to support bargaining as the more plausible pricing mechanism in distribution channels. While our results continue to support notions of power obtained in previous studies (e.g. a manufacturer with a high market share has relatively more power) they also shed light on nuances that were hitherto unexplored. Particular among there are the factors that in‡uence bargaining power such as cost advantages and brand equity.