Assessing the economic value of distribution channels: An application to the personal computer industry

Evaluating proposed changes in channels of distribution and matching products to channels in multichannel product markets are difficult tasks for the management of any company. Such policy-oriented issues cannot be addressed easily by methods such as controlled experiments in test markets, which are feasible methods for evaluating pricing and advertising decisions, or by using historical sales/profits data. In this article, the authors show how the framework of structural modeling and policy simulations can be used to evaluate such policy changes. They also show how to assess the economic value of each channel to each firm and to its customers. They apply such policy simulations to the personal computer market, which is characterized by multiple firms competing through various channels using multiple products. The analysis quantifies the profit impact on firms and the welfare impact on consumers of many proposed channel actions and provides an economic rationale for different actions observed in this marketplace, such as decisions to add or drop marketing channels. The authors also simulate the effects of the Hewlett-Packard-Compaq merger but go beyond a standard merger analysis by evaluating the effects of various potential channel actions co-incident with the merger.