Game-Theoretic Coordination Mechanisms in Distribution Channels: Integration and Extensions for Models Without Competition

A significant game-theoretic literature on the coordination of distribution channels has developed over the past three decades. We provide an extensive analysis of an important subset of this literature, channels without competition. We review four major models that build on the initial work of Jeuland and Shugan (1983) - who developed a quantity-discount schedule that induces channel members to set price and non-price, marketing-mix variables (MM-variables) at channel-coordinating levels. Moorthy (1987) criticized their schedule's complexity, arguing for a simpler wholesale contract that induces coordination by avoiding double marginalization. Our focus is on coordinating mechanisms that enable decentralized channels to replicate an integrated channel's performance. To ascertain the complexity required for coordination, we build a general model that can be adapted to different channel structures. We employ all two-part tariffs that are embedded in the Jeuland-Shugan and Moorthy schedules; and we offer an original disquisition on how MM-variables affect the wholesale-price contract needed for coordination. Specifically, we show that: center dot The impact of MM-variables on coordination pivots on which channel level provides them and whether their impact on sales is dyad-specific (e.g., co-op ads for a specific retailer) or multi-dyadic (e.g., national advertising that impacts multiple retailers). center dot Coordination requires non-zero margins for all channel members when both channel levels have dyad-specific MM-variables. center dot There are multi-dyadic MM-variables that a Jeuland-Shugan schedule cannot coordinate. center dot We develop an original wholesale-price schedule that coordinates all non-competing channel structure/MM-combinations. The Jeuland-Shugan and Moorthy schedules are special cases of our schedule. (C) 2012 New York University. Published by Elsevier Inc. All rights reserved.