In-Store Media and Distribution Channel Coordination

Abstract:     
We study the effects of retailer in-store media on distribution channel relationships. With modern communication technology, retailers can open in-store media (ISM) in their stores and allow manufacturers to advertise in-store. We show that ISM has an important role in coordinating a distribution channel on advertising volume, product sales, and mitigating supplier competition. Improved channel coordination is achieved through the internalization of advertising decisions from commercial forms of media (i.e., radio, TV, newspaper, etc.). We show how a retailer may strategically subsidize manufacturers on their advertising through ISM to better coordinate the channel. This subsidization is optimal even if ISM is more effective than commercial media. With manufacturer competition, a retailer can strategically use a "competitive premium" to ration excessive advertising between competing suppliers in a category. When manufacturers are asymmetric with pre-advertising brand awareness, a retailer has an incentive to price discriminate by charging lower prices to manufacturers whose brand awareness is higher. In addition, retailer ISM can benefit social welfare even when in-store media is less effective than commercial media. However, if in-store media effectiveness is very low, a retailer may introduce in-store media for its own benefit to the detriment of social welfare.

Keywords: In-store Media, Advertising, Distribution Channel, Channel Coordination, Retailing

JEL Classification: M3 M31, M37

working papers series