A Theory of Conventional Channel with Kickbacks

44 Pages Posted: 13 Aug 2018

See all articles by Upender Subramanian

Upender Subramanian

University of Texas at Dallas - Naveen Jindal School of Management

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing

Date Written: July 23, 2018

Abstract

The frequently studied conventional distribution channel has largely overlooked the role of the retail buyer who is employed by the retailer to procure products from the manufacturer. In many economies and industries, the presence of the buyer opens the door for the manufacturer to distort buying decisions by offering the buyer a kickback. In this paper, we introduce the retail buyer in the conventional channel and explore her role when kickbacks are feasible. We examine a context where the buyer may be responsible for ordering the right quantity from the manufacturer to match uncertain demand. A knowledgeable buyer can always help improve the channel efficiency when the channel is clean of any kickbacks. However, when kickbacks are possible, we show that, ironically, the manufacturer may not be the one who benefits. Instead, the retailer or buyer may be made better off. While kickbacks can incentivize the buyer to act against the retailer's interest, the retailer can strategically take advantage of the kickback so as to lower its cost of employing the buyer, effectively shifting the cost to the manufacturer. In fact, the retailer may even tacitly encourage kickbacks and not do all it can to eliminate kickbacks from taking place even if doing so adds no additional cost. Surprisingly, the presence of kickbacks can improve channel efficiency and be a win-win for the retailer and the manufacturer.

Keywords: Channel Conflict, Delegation, Distribution Channel, Kickback, Retail Buyers, Game Theory

JEL Classification: D82, C72, L14, M31

Suggested Citation

Subramanian, Upender and Zhang, Z. John, A Theory of Conventional Channel with Kickbacks (July 23, 2018). Available at SSRN: https://ssrn.com/abstract=3218647 or http://dx.doi.org/10.2139/ssrn.3218647

Upender Subramanian (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

Dallas, TX
United States

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing ( email )

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