Effects of Channel Power on Trade Promotion Budget and Allocation: A Market Experimental Analysis

Abstract

We design a market experiment to examine the impact of channel power on trade promotion budget and its allocation. Our experimental results show that a manufacturer with higher channel power offers a smaller percentage trade promotion budget and decreases allocation to discount-based promotions such as off-invoices. Conversely, a retailer with higher channel power tends to receive larger trade promotion budgets and to increase allocation to discount-based promotions. We validate these findings with econometric analysis of industry data. Overall, results suggest that market experiments can shed light on complex negotiations in the distribution channel for which industry data are often hard to obtain. We discuss implications of our results for managers and policy makers.