Multilateral Bargaining and Downstream Competition

Posted: 13 Nov 2013

See all articles by Liang Guo

Liang Guo

Chinese University of Hong Kong

Ganesh Iyer

University of California, Berkeley - Marketing Group

Abstract

We examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers. In these relationships the negotiations are interdependent, and bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices (and profitability) are similar, and sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price and exclusively supply only the retailer who charged a relatively high retail price and maintained high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition.

Keywords: multilateral bargaining, bargaining timing, bargaining externality, vertical relationships, retail competition

Suggested Citation

Guo, Liang and Iyer, Ganesh, Multilateral Bargaining and Downstream Competition. Marketing Science, Vol. 32, No. 3, 2013; pp. 411-430; DOI: 10.1287/mksc.2013.0766. Available at SSRN: https://ssrn.com/abstract=2328601

Liang Guo (Contact Author)

Chinese University of Hong Kong ( email )

CUHK Business School
CUHK
Hong Kong
China
(852)3943-7830 (Phone)
(852)2603-5473 (Fax)

Ganesh Iyer

University of California, Berkeley - Marketing Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

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