Research Of Marketing Channel Coordination Based On Game Theory

IntroductionIn face of fierce market competition, all enterprises long to set up their core competitive advantage. However, differentiation in technologies, products and price in the same industry is narrowing. Substantial marketing practices show that advantages merely in technology, products and prices are far from enough for the development of the enterprises. Successful sales, to some extent, also depend on efficient coordination of distribution channels among enterprises. As a result, channel coordination has become the core competitive advantage which cannot be replicated.In fact, channel system is constituted of manufacturers, middlemen, consumers and so on, who form a loose interest community altogether. As there exist various self-interests in this channel system, channel members are bound to trigger conflict when it comes to overall channel profits maximizing or individual profits maximizing. Such conflicts exert a serious negative impact on product prices, brands and profits. In this sense, it is an important task for manufacturers to guarantee that the distribution channels are stable and effectively operated. This task is not only a hot issue in marketing management, but also the context of the chosen subject.The paper studies the channel system in a way combining qualitative and quantitative approaches. The author here applies the assumptions proposed by channel professors Shugan (1983, 1986), Moorthy (1987, 1997), and Staelin (1983), etc. Issues of coordination between manufacturers and retailers are primarily studied when it comes to the study of channel coordination.The paper focuses on the advantages coordination brings for channel members. It studies the design of coordination mechanism to reduce intra-channel conflicts and discords, with a view to achieving collaboration between channel members (including manufacturers and retailers) as far as possible.Research design and methodThis paper uses normative theoretical analysis and adopts integrated qualitative and quantitative methodologies, emphasizing the micro-level of channel coordination. In the theoretical model, Game theory is the primary means in the paper. (In fact, the paper applies study approaches of both game theory and information economics, which two fields of knowledge is collectively referred to as Game theory methods in this paper). When it comes to the design of the overall framework, the paper presents systematic analysis method to ensure logical rigor and content integrity. The theme of the paper is channel coordination in channel management.Logical structure and basic contentBased on research design and logical thinking, the paper is arranged as follows:Chapter 1 IntroductionChapter 2 Channels, channel coordination and channel coordination mechanismChapter 3 Selecting and screening of channel membersChapter 4 Differential analysis of channel coordination dynamic mechanism under different types of marketing effortsChapter 5 Research of channel coordination based on customer satisfactionChapter 6 Incentives under information asymmetric coordination MechanismChapter 7 Channel coordination analysis based on evolutionary game theoryChapter 8 Conclusion and research prospect Basic content of each chapter is presented below:Chapter 1 is question presenting and literature review.Chapter 2 establishes game theory model based on 5 common channel structures. The author explores structures of five channels, the corresponding behavior (channel decision-making) of each structure and their relations with channel coordination. From both qualitative and quantitative approaches, this part aims to probe into the reasons to coordinate in channel system. The focus of this part is to study channel structures, channel behaviors, channel coordination and their relations with the help of game models.Chapter 3 believes that it is important to select channel members with collaboration spirit. High-quality channel members (manufacturers and retailers included) are the foundation to achieve close collaboration. In this part, asymmetric information game model is made to study bilateral and adverse member-selection problems, and to analyze the reasons of adverse selection. Furthermore, information screening model is built so that high-quality channel members with coordination spirit will become mutual partners without coping with channel members with low quality or less coordination spirit. Chapter 4 is to quest some channel coordination mechanisms when the channel members are selected. Taking into account that product "reputation" is accumulated during a dynamic process; the author applies differential game methods to study coordination preconditions in hope of using this conclusion to guide marketing channel practice.Chapter 5 discusses channel coordination using theories of customer satisfaction. The author believes that, when undertaking market activities and designing channel strategies, we should take full consideration of customers'characteristics and their demand. This moves to the problem that how we can satisfy our customers. In this framework, the third game play—customers, is added to our thinking box. With this involved, however, both cooperation mechanism and incentive mechanism turn difficult to some extent, and the author has made certain research in this part.Chapter 6 mainly discusses incentive mechanism of channel coordination under asymmetric information. As incomplete information is the main form in the channel, disadvantaged party with less information needs to design reasonable incentive mechanism, which can encourage information advantageous party to sell their products or establish their own brand. Hence, basic principal—agent model, which is principal—agent relation between one manufacturer and one retailer, is introduced to analyze moral hazard problem and its solutions. Finally, to better display generality, the author expands the basic principal—agent model and establishes two advanced model of marketing channel. One is multi-principal—agent model, which is principal—agent relation between many manufacturers and one retailer; the other one is principle—multi-agent model, which is principal—agent relation between one manufacturer and many retailers.Chapter 7: All previous research is based on the basic assumption of entire rationality. Different from the above, the seventh part enters into how to achieve channel coordination under bounded rationality. Adopting methods of evolutionary game theory, the author builds analyzing model, which indicate that the coordination spirit of the channel members is vitally important to achieve a bounded rational coordination. Here, it is hypothesized that coordinated channel members are directly proportional to coordination spirit and the ability to collaborate. Meanwhile, the organization of this chapter moves back to the third chapter in logics, echoing the paper as a whole. Chapter 8 is the summary and prospects of the paper.Innovation of the paperFirstly, if the market is made up of different kinds of retailers, with the proportion of collaborated retailers increasing, the level of retailers'effort will increase and retail price will fall. Meanwhile, wholesale price of manufacturers will go up. Accordingly, optimal profit of manufacturers and retailers will increase. (See more details in Chapter 3.)Secondly, compared with other channel relations (including non-cooperative static channels, Stackelberg channels led by manufacturers and Stackelberg channels led by retailers), channel coordination achieves the optimization. Under this circumstance, optimal sales price is the lowest, optimal marginal profit of manufacturers reaches the peak; optimal brand investment is the highest, optimal marketing efforts of retailers are the largest, and optimal total profit of channel is the most profitable. Meanwhile, the profit shares of manufacturers are within certain scope when coordination, thus both manufacturers and retailers are willing to cooperate with each other. Furthermore, if we divide marketing effort of manufacturers into short-term effort( preferred by retailers) and long-term effort ( preferred by manufacturers), and if manufacturers compensate long-term effort of retailers, when the incentive coefficient changes, total profit of channel coordination, profit of manufacturers and profit of retailers will differ. (See more details in Chapter 4.)Thirdly, from the perspective of information symmetry, manufacturers hope that retailers can make more effort in marketing to satisfy the customers. If retailers are making effort, with no incentives from the manufacturers, retailers will remain to make effort based on customers'satisfaction. However, if manufacturers encourage retailers (by ways of subsidies for the efforts cost), retailers will make more effort. Furthermore, if retailers pay more attention on future revenues of channel coordination, manufacturers should reduce incentives to retailers. From the perspective of information asymmetry, manufacturers'degree of optimal effort (general marketing effort) increases with the increase of incentive coefficient and retail price, and has nothing to do with wholesale price. Meanwhile, optimal incentive coefficient decreases with the increase of risk-avoiding of channel members and production uncertainty. (See more details in Chapter 5 and Chapter 6.)Fourthly, under the assumption of bounded rationality, the possibility of channel coordination is in positive proportion with excess profits. When the excess profits approach infinity, manufacturers and retailers are in full coordination. If the manufacturer (or retailer) is cooperative while the retailer (or manufacturer) is not, the loss of manufacturer (or retailer) to coordinate is smaller, and the possibility of channel relations approaching coordination is greater. The possibility of channel coordination is positively proportional to the respective discount factors. (See more details in Chapter 7.)The drawbacks of the paperFirst, the paper is based on the study of channel members'micro behavior mechanism, and draws some conclusions by applying quantitative methods. However, marketing practice is slightly lacking in the paper. For instance, the author believes that we should adopt appropriate incentives to retailers or manufacturers. While in reality, there are so many measures of incentives in marketing practice that the author does not include these measures divested of the variables into the model.Second, the adoption of game theory has led to some useful conclusions. Holmstrom and Milgrom (1987) believe that a simple contract often turns out to be the optimal one in reality. Theory researchers have designed complicated mechanisms of channel coordination (including some mechanisms in this paper) by digging into a great deal of study. The practicality of these mechanisms is not yet studied. Nevertheless, a superior way is to make empirical analysis to prove the practicality of our conclusions. We can only go this far to study a few enterprises'cases as it is very difficult to accumulate empirical data constrained by research funding and limited time.Third, in order to achieve Pareto Optimality of the channel, for example, the integration mechanism may be optimal in certain context while quantity discount mechanism may be optimal under another condition. In order to achieve collaboration, the author has noticed, a number of mechanisms are "imposed" to retailers (or manufacturers). Although collaboration is achieved, it is "unfair" for one party of the channel members. Therefore, "fairness"in channels is of great concern to both manufacturers and retailers, in which the author does not intensively study.