The Effect Of Retail Channels And Strategies Of Retailers And Manufacturers On Innovation

Both manufacturers and retailers have accomplished great development since the specialization between them. With the enlarging and shifting market powers of the two participants, manufacturers and retailers share the common interests, and at the same time they are competing with each other base on their market powers. Retail market is the place for the final products to face the consumers and obtain their final values, and for the manufacturers to realize their profits, hence the profits made in retail market could effect the decision in the upstream market through a series of intermediate variables. In most of the existing literatures, innovation is considered to be a given condition, based on which the risk and profit are fixed and the retailers take corresponding measures. Nevertheless, under the real economic environment, all the factors interacts with each other, as a result, not only the innovation could effect retail market, but also the situation in the downstream market could effect manufacturers' decision on innovation too. In the recent years, most of the conflicts between manufacturers and retailers are caused by slotting allowances, which reinforce the development of retailers' private brands and manufacturers' self-constructed channels. All of the three aspects could influence manufacturers' innovation decision by impacting the participants' willing to cooperate, retailers' desire for new products and chances in retail market structures. This paper if aimed at the influence of parameters of retail market on innovation decision in the product process, especially how the slotting allowances, retailers' private brand and producers' self-built channels affect the innovation policy. Further more some suggestions are given for the development of Chinese retail business. And considering the open retail market in the environment of economic globalization, we should draw the experiences of developed markets and furthermore improve our laws and rules on retail market.The paper is consist of the following eight parts, introduction, the relevant concept and literature review, the relationship between retail channel and innovation, the effect of slotting allowances on innovation, the effect of retailers' private brands on innovation, the manufacturers' self-constructed channels on innovation, currents development of China's retail market and suggestions to promote innovation, and finally the conclusion and research prospect.By reviewing the current literatures on innovation and vertical relationship between manufacturers and retailers, factors that effect innovation of different product stages and types, and the ones that effect producers'and retailers' profit, are found. The connections between the factors are the basic of this paper. With reasonable simplified assumption, we could compare the situations with or without the slotting allowances, privation brands and self-built channels before and after innovation. When other parameters are fixed, alteration of some facts may change the innovation decision, based on which the directors of retail market could make relative policies to guarantee the positive influence of retail market on innovation.There are four mail conclusions of this paper. First of all, slotting allowances, private brands and self-built channels could effect the profits and innovation inspiration of innovation in the upstream market. Define the common retail pattern of producers sell products through specialized retailers as tradition retail channel, and then the private brands and self-constructed channels could be viewed as the expanded form of the traditional channel, namely the outside choice. Slotting allowances are shift of profit from manufacturers to retailers within the channel, and could stimulate manufacturers'innovation by offsetting the potential risks. However an excess of slotting allowance would occupy big amount of the producers'capital and hinder the innovation. Specialized retailer should take into account the profits made by selling both private brand product and manufacturer brand product, and maximize the combination profit. Private brands with low prices and slotting allowances could both be the tools of the retailer to make profit. Self-constructed channels would impact the structure of the retail market by breaking the retailers' monopoly in the industry. To stay profitable in the competition with retailers, producers have to focus on innovation so as to maintain the products'diversity.Secondly, it is the one-time slotting allowance rather than linear fee that would affect the equilibrium. Such transfer of profit would not cause a waste of capital as advertisement does. When making the decisions, retailers have to take their development stage as well as the manufacturers'scopes in to consideration.Thirdly, retailers'private brands could stimulate innovation by decrease the prices of manufacturer brand products, and the innovation would lower the prices of both brands in return. When the innovation reduces the marginal cost of production, there could be a chance that manufacturers would like to increase the slotting allowances so as to reinforce the retailers' willing to cooperate. Further more, when relaxing the assumption to allow the retailers' private brand production to innovate, both the manufacturer and the retailer would enjoy more profit. Finally, there are two effects of manufacturers'self-built channels. On the one hand, they could convert the consumers from the original channels to the new ones, on the other hand, they could attract more customers and increase the demand. This paper mainly focuses on the latter one. Manufacturers'innovation could reduce the marginal cost in production or marketing, or could generate a completely new product. Slotting allowances could become an actual payment from retailers to manufacturers as a cost for the risk assets with relatively high rate of return. Besides, with the development of internet, transportation and electronic commerce, internet retail, which could be considered as a kind of self-built channels, could stimulate innovation more than ever before.Three innovation ideas could be seen in this paper. First of all, the effect of retail channels on innovation is systematically studied. Although in the existing researches, innovation of products has been taken into account, the retailers'strategies'influence on innovation have seldom been studied. Secondly, internet retail is considered as a new type of innovation with lower costs, lower risks and better chances to succeed. Finally, the willing to cooperate, the quality of products and the differential marketing strategies of new products are considered respectively as the intermediate variables of slotting allowances, private brands and self-built channels effect of innovation. Such assumption is more accordance with the reality.