Power and performance in three-level distribution channels: conceptualisation and game-theoretical analysis.

• Author: Kunter, Marcus
• Position: Report

1. INTRODUCTION

   Relationships in a distribution channel involves the parties (e.g. manufacturer, wholesaler, retailer) bargaining over payment schemes (e.g. prices, slotting allowances, cooperative advertising payments). It is not merely a relationship in which parties make take-it-or-leave-it offers to the opponent (Iyer and Villas-Boas, 2003; Misra and Mohanty 2008). But individual outcomes as well as channel performance may rely on the distribution of power in the channel.

   The concept of "power in a distribution channel" (briefly channel power) has generally been defined as a channel member's ability to control the decision variables of another member of the channel (El-Ansary and Stern, 1972; Gaski, 1984; Brown et al., 1995). It is well-known from literature on economics, social sciences, and psychology (see e.g. Lewicki et al., 2006; Coleman 2006) that there are other factors determining power, such as information, capabilities, resources and personal factors (e.g. individual skills, traits, preferences). Hence, the conceptualisation of channel power from marketing literature seems quite narrow. Moreover, some contributions regard channel power as a source of wholesale price levels (Iyer and Villas-Boas, 2003; Misra and Mohanty, 2008) or the nature of channel interactions (Choi, 1991; Kadiyali et al., 2000; Huang and Li, 2001). These understandings of channel power seem quite cloudy and show the need for a systematic approach. We contribute to the marketing literature on channel power by broadening the concept of channel power as "control of decision variables", assembling knowledge from economics, social sciences and psychology. Moreover, we incorporate this concept into the asymmetric Nash bargaining framework (Nash, 1950; Harsanyi and Selten, 1972), which is frequently applied in marketing literature on bargaining (see Iyer and Villas-Boas, 2003; Dukes et al., 2006; Misra and Mohanty, 2008). Besides, we embed the Nash bargaining framework in a game-theoretical Stackelberg model.

   We investigate individual outcomes and channel performance of alternative distributions of channel power in a three-level distribution channel. In a two-level channel (which is frequently studied in marketing and operations research literature, see e.g. Jeuland andShugan, 1983; Pasternack, 1985; Huang and Li, 2001; Iyer and Villas-Boas, 2003; Cachon and Lariviere, 2005), it is clear that one channel members gains more individual surplus than his opponent if he exhibits more power vis-a-vis his opponent. However, many real-world distribution channels are not two-level, but multi-level systems. According to the U.S. Census Bureau in 2004, sales for manufacturers, wholesalers, and retailers were (in billions) $350, $253, and $293, underpinning the significance of a wholesale level in channels. The literature on channel performance in three- and multi-level distribution channels is very scarce. There exist a few contributions from operations research, studying economic lot size models with inelastic demand (Munson and Rosenblatt, 2001), price-elastic demand (Mishra, 2004; Huang and Huang, 2010), and price-elastic demand and horizontal competition (Huang et al., 2011). We contribute to this literature by explicitly modelling channel power. We study a game-theoretical Stackelberg model of a three-level distribution channel where consumer demand is affected by retail price and investigate the following question: Does the manufacturer (retailer) prefer the retailer (manufacturer) to have power over the wholesaler or vice versa? To our best knowledge, this question was not studied in the literature so far. We also investigate the impact of a wholesaler's power vis-a-vis the manufacturer respectively the retailer in a bargaining situation on distribution channel performance.

   The rest of the paper is organised as follows: In the next section, we conceptualise channel power and embed it in an asymmetric Nash bargaining framework. In section 3, we develop a game-theoretical Stackelberg model and derive the main results, which are discussed in section 4. We conclude with a summary, managerial implications and directions for further research in section 5.

2. CHANNEL POWER AND ASYMMETRIC NASH BARGAINING

   The purpose of this section is to connect "power in a distribution channel" as an economic and psychological concept with the theory of asymmetric Nash bargaining.

   2.1 The Concept Of Power In A Distribution Channel

   There exists a vast literature from philosophy, history, sociology, political science, psychology, and economics, illustrating many conceptualisations of power (Coleman, 2006, p. 121). For the power analysis of distribution channels, we distinct between relational and individualistic power (Wolfe and McGinn, 2005), and between sources and consequences of power.

   Due to a widely used definition from economics, power is the ability of one party to get another party to do something it otherwise would not have done (Dahl 1957, see also Coughlan et al., 2001; Lewicki et al., 2006). This refers to relational power (Deutsch, 1973), i.e. a party (A) has no power unless there exists an other party (B) as a target of influence. In distribution channels, the sources of relational power are a channel member's control of information (Lewicki et al., 2006), decision variables (El-Ansary and Stern, 1972; Gaski, 1984; Brown et al., 1995), capabilities (e.g. expertise), resources as well as outside alternatives to the deal, and so on. These variables, controlled by A, could exhibit a utility or disutility for B. Hence, A could influence B or B is dependent on A (Emerson, 1962) and A has a certain amount of power over B. Individualistic power originates from personal factors--attributed to a group or person--such as individual skills, traits, preferences and risk attitude, and increases the likelihood of attaining a good position in bargaining situations. Some authors refer to this as bargaining power (Draganska et al., 2010). Both relational and individualistic power determine the distribution of power in the distribution channel.

   So far, we discussed the sources, now we turn over to the consequences of channel power. Outcomes, such as margins (Betancourt and Gautschi, 1998), profits (Betancourt and Gautschi, 1998; Coughlan et al., 2001) or the profit improvements of the deal in relation to an outside agreement (Nash, 1950; Draganska et al., 2010), are considered as consequences of power in...