Abstract and Keywords
We model multiple brands in a product category so as to determine how channel members’ profits and consumers’ surplus are affected by distribution channel structure, manufacturer and retailer pricing policies, brand differentiation, and brand promotion. We employ a game-theoretic analysis with linear demand to prove that, in a decentralized channel, there are parametric values for which (1) jointly setting prices to maximize total category profits leads to more brands than does individually setting each brand’s price to maximize that brand’s profit; (2) unless brands are little differentiated, all channel members would be better off pricing to maximize brand profit rather than category profit. Neither of these points hold for a vertically-integrated channel. (3) We also prove that a decentralized channel that maximizes brand profit generates more consumers’ surplus than does a vertically-integrated channel.
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