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The Benefits of Competitive Upward Channel Decentralization

Author

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  • Yunchuan Liu

    (College of Business, University of Illinois at Urbana-Champaign, Champaign, Illinois 61820)

  • Rajeev K. Tyagi

    (The Paul Merage School of Business, University of California, Irvine, Irvine, Calilfornia 92697)

Abstract

Upward channel decentralization occurs when firms choose to not manufacture products by themselves and procure products from upstream suppliers. Current voices from marketing scholars and practitioners have predominantly focused on the cost benefits when production is outsourced to lower-cost upstream suppliers. In this paper, we study the effects of upward channel decentralization where competing firms can outsource their production to upstream suppliers who do not have any advantages on production costs. We show how downstream firms can still benefit from upward channel decentralization provided their product positioning is endogenous. Thus, we provide a new theory on the strategic benefits of upward channel decentralization. We also use this framework to show a new benefit to manufacturers selling through downstream retailers rather than directly. We examine the implications of our theory for consumer and social welfare, and also draw managerial implications. This paper was accepted by Pradeep Chintagunta, marketing.

Suggested Citation

  • Yunchuan Liu & Rajeev K. Tyagi, 2011. "The Benefits of Competitive Upward Channel Decentralization," Management Science, INFORMS, vol. 57(4), pages 741-751, April.
    • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:4:p:741-751
    DOI: 10.1287/mnsc.1110.1311
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    References listed on IDEAS

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