Bargaining, Third-Party Information and the Division of Profit in the Distribution Channel∗

The consolidation of power among retailers in recent years has forced many manufacturers to compete in a channel structure in which managing relations with retailers has become just as important as competing with one’s rivals. One consequence of this is that supply terms are now often negotiated individually with each retailer (e.g., wholesale prices, quantity discounts, cooperative advertising, slotting allowances). In this paper we use a bargaining framework to address the question: how do profits get allocated in a distribution channel in which a retailer carries the products of competing manufacturers, and how do these profits change in response to changing market conditions. We find that each manufacturer’s profit depends on its product’s incremental contribution to overall channel profit. In addition, we find that when demand conditions change over time, the type of information/advertising that induces the change (i.e., whether it is product-specific or relates to the whole category, and whether it is of equal relevance to all consumers or affects some consumer groups more than others) is critical in understanding which firms gain and which firms lose.