Distribution Channels: An Extension of Exclusive Retailership

The underlying channel structure in most studies to date has consisted either of exclusive dealers that sell only one manufacturer's brand or of a single retailer selling multiple brands. Little attention has been given to the larger segment of most consumer goods markets in which retailers compete to sell multiple brands at the same location. This research seeks to add to the growing literature of channel competition by analyzing three channel structures, the least constrained of which deals with two competing manufacturers and two retailers, each of whom distributes both products in a noncooperative game with two Nash's and one Stackleberg equilibrium. Using differentiated products and a linear demand function, we introduce the concept of “store substitutability”—a measure corresponding to product substitutability representing competitiveness at the retail level—between the two retailers. We are able to obtain closed form solutions for all cases. We show that the presence of competitive effects at both retail and manufacturer levels of distribution has a significant impact on profits and prices. We also study the effects of various power relationships in the channel. Furthermore, we compare these results to those obtained by previous research. Finally, we propose some testable implications and suggest avenues for future research.