A Study On Distribution Channels:Service Outsourcing,Upstream Collusion And Information Sharing

This thesis examines three issues in distribution channels:service outsourcing, upstream collusion and information sharing, and therefore comprises three parts.In the first part, we examine the impacts of service outsourcing under different channel power scenarios. The manufacturer can choose whether to outsource service when distributing its products through an outside independent retailer, or not.We first consider pricing and service decisions between the decentralized channel and the integrated channel, and find that either higher service levels or lower retail prices can arise in the decentralized channel with service outsourcing compared with those in the integrated channel, but they never occur simultaneously. Next, we consider how service outsourcing affects the manufacturer’s channel strategies and channel performance, and obtain the following results. If service is taken as a non-strategic decision, in manufacturer-and retailer-Stackelberg markets, service outsourcing will always help the manufacturer earn more profit from the decentralized channel than from the integrated channel, as long as the retail service provision is sufficiently efficient. However, in the vertical Nash market, the manufacturer’s additional profit is only possible when he is not efficient but the retailer is sufficiently efficient in service provision. On the other hand, with service taken as a strategic decision, decentralized channel with service outsourcing will always help the manufacturer accrue more profit than from the integrated channel, so long as the retailer is a proficient service provider. Third, we compare the manufacturer’s profits across various channel structures and the results are as follows. If the service is a non-strategic decision, then the manufacturer obtains the highest level of profit in the manufacturer-Stackelberg market; however, with service being strategic, the manufacturer can accrue the highest level of profit in any of the three channel scenarios, depending upon the efficiency of the retailer’s service provision. Fourthly, channel performance analyses are also conducted. It is found that the retailer-Stackelberg channel never fares best with non-strategic service, while the manufacturer-Stackelberg channel never performs best if service is a strategic decision.Furthermore, we analyze the scenario involving the manufacturer’s endogenous quality investment, which adds an additional dimension of decision flexibility to the manufacturer. As before, this scenario involves two variants corresponding to whether the non-price decisions (service and quality) are strategic or not. Overall, we find the following results.First, we find that quality investment can be stimulated when the manufacturer outsources to a more efficient retailer. Similar logic applies to the service investment. Second, price decision comparisons are more involved compared with the counterparts without the manufacturer’s quality investment. Third, with this extra decision flexibility, it is found that service outsourcing will always enable the manufacturer to accrue higher profits from the decentralized channel than from the direct channel in all channel power structures if the retailer is sufficiently efficient in service provision. Fourthly, we find that, with nonstrategic service and quality, the manufacturer could accrue the highest profits either in the manufacturer-or retailer-Stackelberg channels, but never in the vertical-Nash channel; however, with strategic non-price decisions, the manufacturer could fare best in either the vertical-Nash or retailer-Stackelberg channels, but never in the manufacturer-Stackelberg channel. Fifth, regarding channel performance, we show that, depending upon the efficiency of quality and service investments, either the manufacturer-or retailer-Stackelberg channel can fare best; however, the vertical-Nash channel always performs best with strategic non-price decisions.We also study service outsourcing in the context where the manufacturers engage in channel competition faced with a common retailer’s value-adding service. Specifically, we analyze channel competition within a supply chain comprising two manufacturers and one common retailer, where each manufacturer can choose to sell its products either directly to the end market or through the intermediate retailer, who provides additional demand-enhancing service to promote retailing. If only one of the manufacturers sells products through the retailer, its products will be promoted by the additional service from the retailer, which thus poaches demand from the manufacturer who sells his products directly to the end-consumer market. Products of both manufacturers are supported by the retail promotional service when they distribute their products through the common retailer. We show that various channel structures can endogenously arise in equilibrium, and managerial insights are derived from numerical analyses.The second part of this thesis discusses tacit collusion between manufacturers in distribution channels. First, the effects of managerial incentives by downstream firms on upstream collusion are examined, and we find that downstream profit-and-revenue incentive schemes render upstream manufacturers more willing to collude than pure-profit incentive schemes do, when retailers compete on prices. However, the reverse occurs under quantity competition mode. Second, endogenous competition modes are considered in a vertical context, with upstream collusion taken into account. It is revealed that, in equilibrium, retailers may engage in Bertrand, Cournot or mixed Bertrand-Cournot competition, depending on the discount factor and the relationship between the products.In the third section, we examine information sharing in a vertical Nash channel. Conventional wisdom suggests that information sharing benefits all participants, or at least one of the participants. However, we reveal that, in a channel consisting of one manufacturer and one retailer, where they engage in a vertical Nash pricing game, information sharing can be strategically detrimental to both channel members, or profitable to either, but never benefits both of them concurrently. It is also found that information sharing always has an adverse effect on channel performance, consumer welfare and, therefore, social welfare. Furthermore, we demonstrate by comparative statics that each channel member’s beneficial area is smaller as its forecasting component becomes more fluctuating, and larger as its signal becomes less accurate. The areas of Pareto inferior regions caused by the strategic peril of information sharing are non-monotonic in exogenous parameters.