The Benefits of Competitive Upward Channel Decentralization

20 Pages Posted: 22 Jan 2011

See all articles by Yunchuan Liu

Yunchuan Liu

University of Illinois at Urbana-Champaign

Rajeev K. Tyagi

University of California, Irvine - Marketing Area

Date Written: January 5, 2011

Abstract

Upward channel decentralization occurs when firms choose to not manufacture products by themselves, and procure products from upstream suppliers. Current voices from marketing scholars and practitioners have predominantly focused on the cost benefits when production is outsourced to lower-cost upstream suppliers. In this paper, we study the effects of upward channel decentralization where competing firms can outsource their production to upstream suppliers who do not have any advantages on production costs. We show how downstream firms can still benefit from upward channel decentralization provided their product positioning is endogenous. Thus, we provide a new theory on the strategic benefits of upward channel decentralization. We also use this framework to show a new benefit to manufacturers selling through downstream retailers rather than directly. We examine the implications of our theory for consumer and social welfare, and also draw managerial implications.

Keywords: Upward Channel Decentralization, Production Outsourcing, Product Positioning, Distribution Channel, Game Theory

Suggested Citation

Liu, Yunchuan and Tyagi, Rajeev K., The Benefits of Competitive Upward Channel Decentralization (January 5, 2011). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1744333 or http://dx.doi.org/10.2139/ssrn.1744333

Yunchuan Liu (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL Champaign 61820
United States
(217)244-2749 (Phone)
(217)244-7969 (Fax)

Rajeev K. Tyagi

University of California, Irvine - Marketing Area ( email )

Irvine, CA 92697-3125
United States
714-824-5584 (Phone)
714-824-8469 (Fax)

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