Competition and Cooperation in Marketing Channel Choice: Theory and Application

This paper discusses the problem of choosing a vertical marketing channel in a product-differentiated duopolistic market. Firms choose product price and the form of the marketing channel to maximize profits. It is shown that integration of the marketing function results in greater price competition and lower prices than does the use of independent marketing middlemen. The profitability of reducing price competition by using such middlemen is investigated. Two hypotheses—that integration is negatively associated with the products' substitutability and that symmetric channel structures are stable—are tested in a preliminary way and supported with survey data from the international semiconductor industry.