Role of Bargaining in Marketing Channel Games of Quality Choice and Profit Share

Since the 1980s, increased concentrations across marketing channels have changed bargaining relationships between retailers and manufacturers both in North America and in Europe. At the same time contract mechanisms within the marketing channels have become more complex and private label market share have grown rapidly. This paper Örst investigates the implications of bargaining between manufacturers and retailers. The analysis applies to an arbitrary number of manufacturers and retailers, and holds under general technology and product di§erentiation conditions, assuming that each retailer acts as a monopolist on its own market. Under Nash bargaining, we show that two widely used types of contracts (quantity forcing contracts and two-part-tari§ contracts) are su¢ cient to obtain e¢ ciency in the channel conditionnally on products speciÖcations but importantly generate a di§erent sharing of surplus. We then investigate the implications for non cooperative quality choices made before the bargaining stage. We examine how the bargaining power of retailers and manufacturers a§ect the quantity, pricing and quality decisions. This provides useful insights into the changing relationships between manufacturers and retailers. Our analysis helps explain the recent growth of private labels, exclusive products for retailers designed by national brand manufacturers, the growing use of side payments and other emerging trade practices.