Lecture 22 Channel Conflict and Solutions

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Why Use Channel Intermediaries?

Wholesaleror Retailer

With Intermediaries

Milk P1 Bread P2 ShampooP3 Soap P4

C1 C2 C3

P1 P2 P3 P4

C1 C2 C3

Without Intermediaries

Reducing Transaction Costs

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Why Channel Intermediaries? Customers buy baskets or “assortments” of goods.

Economizes on the time cost of shopping

Retail Service is most efficiently provided by an intermediary product demonstration, after-sales service

Inventory carrying Intermediaries provide inventory buffer. Hedge against

demand fluctuations for the manufacturers.

Financing Examples _________ or ___________

3

Coordinating channels is critical for efficient behavior of retailers.

Channel decisions go hand in hand with the other elements of the marketing mix.

Channel decisions have greatest the most long-term impact and are the hardest among all marketing strategy to change.

4

Types of Channel IntermediariesGoodyear’s Distribution

Industry Goodyear

Garages 6 0

W. House clubs 6 0

Mass Merchandisers 12 0

Manufacturer Owned 9 27

Independent 63 58 (50 indp. 8 franchises)

Other 4 15

What does this imply?

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Goodyear’s Distribution

Goodyear penetration 4400 outlets vs. Michelin 7000 outlets. What are the pros and cons of Goodyear's selective distribution.

What does Goodyear gain from its focus on the independent dealer channel?

What is the role of Goodyear’s company-owned outlets?

6

Should Goodyear Expand distribution to Mass Merchandisers?

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Managing Retail IntermediariesChannel Conflict

When each member of the channel is an independent business, retailers might not behave according to the manufacturer desires

This is called Channel Conflict

Key problems with independent channels = Channel Conflict.

Each member has her own private interests or profits in mind.

Retail perspective may be more short term short-term profits than the manufacturer.

National vs. Local perspective

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Solution to Channel Conflict:Channel Coordination

General Principle Manufacturers must find ways to maximize total channel profits.

Why?

The incremental profits can be used in two ways: Absorbed by the manufacturer leaving the retailer or other down

stream channel member no worse than before. Shared with the channel members to reward them for providing

better service.

The challenge is to get the retailers to “behave” in a conventional channel with independent retailers

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Channel Conflict and CoordinationDouble Marginalization

ManufacturerGoodyear

ManufacturerGoodyear

Retailer(Independent Dealer)

Retailer(Independent Dealer)

MarketMarket

C = 10

W

P

P D

30 10

40 6

50 2

D(P)

Demand for Goodyear Tiempo at your dealership

First stage

Second stage

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Double Marginalization

P D Ret_Profit Mfg_Profit Total_Profit

30 10 20*10 = 200 0 200

40 6 30*6 = 180 0 180

50 2 40*2 = 80 0 80

W = 10

30 10 10*10 = 100 10*10 = 100 200

40 6 20*6 = 120 10*6 = 60 180

50 2 30*2 = 60 10*2 = 20 80

30 10 X X X

40 6 0 180 180

50 2 10*2=20 30*2=60 80

W = 20

W = 40

30 10 0 200 200

40 6 10*6 = 60 20*6 = 120 180

50 2 20*2=40 20*2=40 80

W = 30

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Double Marginalization Problem

What wholesale price will the manufacturer charge? Manufacturer wants high W,

But this forces retailer to charge high retail prices with too little demand

Can the manufacturer do better?

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Solution to Double Marginalization

Two-Part Tariff: McDonalds charges Upfront Franchise Fees from its franchise

and a variable royalty…Why?

Two part tariff = F + w*Q Suppose the manufacturer asks the retailer for an upfront

Franchise Fee (F = $195) and in return charges w = c = 10… What happens?

Manufacturer Profits = 195, Retailer Profits = 5 Retail price = low at 30 Demand = high at 10.

Upfront Franchise fees helps in solving channel conflict because it helps the manufacturer to lower wholesale price without sacrificing profits.

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Channel Conflict and CoordinationHorizontal Conflict

Horizontal Retailer “Free-Riding”: Services provided by one retailer helps other competing retailers

McDonald’s franchisees in a region. Free riding of pre-sale informational services. Goodyear selling to discounters and mass merchandisers.

Solutions

Exclusive territories: Retailer is guaranteed all consumers in a territory? What are the benefits?

Saturn dealerships Prevents free-riding of retail services.

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Vertical Retailer Free-Riding

Retailer may use the manufacturer’s brand to draw customers into the store and then sell other higher margin brands (Bait-and-Switch) Possible problem with Goodyear dealers as the market

matures and becomes more competitive.

Solution

Provides incentives to retailers to invest in service to build up the product and therefore the manufacturer to invest in advertising and brand building.

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Channel Conflict and CoordinationManufacturer Free-Riding

Manufacturer may not provide the promised advertising support for the retailers local market.

Manufacturers may open supply to competing retailers after a retailer has invested in developing the manufacturer’s product.

Solution

Why are automobiles often sold through exclusive dealerships in exclusive territories….

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Next Class

Project Day I will be available for individual meetings Preference for appointments