Channel Coordination When Retailers Compete

Charles A. Ingene and Mark E. Parry

This paper explores channel coordination by a manufacturer that sells through competing retailers and that treats these retailers equally, as required by the Robinson-Patman Act. The authors show that, in general, there exists no single two-part tariff with a constant per-unit charge obtained by a vertically integrated system; that is, the channel cannot be coordinated except in the trivial cases of identical or noncompeting retailers. However, an appropriately specified quantity-discount schedule will enable the channel to earn the same profits generated by a vertically integrated system. Conditions are derived under which a manufacturer will prefer to offer various two-part tariffs with constant per-unit charges instead of the channel-coordinating quantity-discount schedule.

The authors also establish the existence of a menu of two-part tariffs that mimics all results of a vertically integrated system. However, only under stringent conditions will retailers select the appropriate tariff from the menu. When these conditions are not satisfied, the channel is worse off than in the case of a single, second-best tariff. It is also demonstrated that under a wide range of parametric values the manufacturer will prefer to offer the second-best two-part tariff rather than a menu of two-part tariffs that could maximize channel profits.

(Channels of Distribution; Pricing Research; Game Theory)