Equilibrium Channel Structures for Branded Variants under Uniform and Non-uniform Pricing

Abstract

This paper examines why, despite common belief that manufacturers should control their product prices to avoid double marginalization, we often see products being sold through independent retailers, either exclusive or non-exclusive. We consider two manufacturers in a Bertrand competition, each selling two product variants through both exclusive and non-exclusive retailers. Manufacturers choose between direct sales via an integrated channel or indirect sales through a decentralized channel. We explore how equilibrium channel structures vary under two prevalent pricing schemes: uniform pricing (identical prices for all variants) and non-uniform pricing (variant-specific prices). Our results show that a decentralized system is more likely to occur with non-uniform pricing than with uniform pricing. The key determining factors include cross-product substitutability and branded variant market size. Specifically, in the case of exclusive retailers, under uniform pricing, decentralization can only become an equilibrium if product substitutability is high in both product variant markets. Under non-uniform pricing, however, decentralization can prevail even if one of the branded variants has a low product substitutability, provided that the market for the other variant is not too small. Furthermore, the tendency of decentralization is non-monotone in product substitutability. When the market size gap is medium, an increase in product substitutability does not necessarily lead to decentralization. Interestingly, in the presence of a non-exclusive retailer, decentralization can become an equilibrium without high substitutability. Our results provide insights and guidelines for manufacturers in strategizing channel structures for branded variants, emphasizing the need to weigh the trade-offs among channel integration, market dynamics (such as competition and digital evolution), and the intricate interplay of consumer preferences and brand interactions.

Keywords: competing supply chains, distribution channel structures, uniform pricing, non-uniform pricing, branded variants