Manufacturer Allowances and Retailer Pass-Through Rates in a Competitive Environment

Sang Yong Kim; Staelin, Richard
March 1999
Marketing Science;1999, Vol. 18 Issue 1, p59
Academic Journal
Abstract A commonly held belief has grocery and mass merchandise retailers gaining power relative to the upstream consumer package goods manufacturers. One of the major justifications for this belief is that manufacturers are now giving retailers more side payments such as trade allowances, slotting allowances, etc. However, a number of researchers have shown that these concessions have not translated into increased profit for the retailer relative to the manufacturer.This paper explores, via an analytic model, why one might see retailers getting concessions from the manufacturer without being able to translate them into high profits. We do this by representing the interaction between the channel members as a one-period profit maximizing game where manufacturers decide on how large a side payment (i.e., a concession) to give to each retailer and retailers decide on how much of this side payment to use to promote the manufacturer's product.At the heart of our model is a demand function for each product offering (i.e., a specific brand sold by a specific retailer). This demand function is linear in own and other's prices, but based on empirical evidence is assumed to be nonlinear in the effects of merchandising activities (e.g., short term price discounts, better shelf space, advertising, etc.). Specifically, merchandising effects are modeled with a square root function that also acknowledges most short-term promotional effects result in brand or store switching versus increase category volume.The model is composed of six parameters. These are the inherent popularity of the brand at a particular outlet, own price sensitivity, cross (but within the store) price sensitivity, customer's sensitivity to within store promotion activities, customer's sensitivity to between store promotional activities, and the degree to which promotional activities yield incremental product category sales. We use our underlying demand formulation to find the equilibrium solution to th...


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