IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v7y1988i4p335-355.html
   My bibliography  Save this article

Strategic Decentralization in Channels

Author

Listed:
  • K. Sridhar Moorthy

    (Yale University)

Abstract

The purpose of this paper is to understand the effect of strategic interaction on a manufacturer's channel-structure decision. In the model I analyze, if there were no strategic interaction, then the manufacturer would prefer vertical integration to decentralization. With strategic interaction, however, decentralization can be a Nash equilibrium strategy (as McGuire and Staein [McGuire, Timothy, Richard Staelin, 1983a. An industry equilibrium analysis of downstream vertical integration. (Spring) 161–192.] showed). So the question arises, What is it about strategic interaction that makes decentralization a Nash equilibrium strategy? The answer I give is that strategic interaction makes it possible for a manufacturer's retail demand curve to rise when he decentralizes. I show that this raising of the demand curve on decentralization can happen only if one of the following (mutually exclusive) conditions is satisfied: (1) the manufacturers' products are demand substitutes at the retail level and strategic complements at the manufacturer or retailer levels, (2) the manufacturer's products are demand complements at the retail level and strategic substitutes at the manufacturer or retailer levels. Strategic complementarity at the retailer (manufacturer) level means that if one retailer (manufacturer) raises his price, then the other retailer (manufacturer) would raise his price as well; strategic substitutability is just the opposite. These results show that what is important for decentralization to occur is not how (demand) substitutable the two manufacturers' products are (as one might have thought from earlier works in the literature), but rather the nature of coupling between demand dependence and strategic dependence.

Suggested Citation

  • K. Sridhar Moorthy, 1988. "Strategic Decentralization in Channels," Marketing Science, INFORMS, vol. 7(4), pages 335-355.
    • Handle: RePEc:inm:ormksc:v:7:y:1988:i:4:p:335-355
    DOI: 10.1287/mksc.7.4.335
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.7.4.335
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mksc.7.4.335?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:7:y:1988:i:4:p:335-355. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.