Manufacturers of consumer products often complain of lower profits in light of the growing channel dominance of retailers such as Wal-Mart, Home Depot, and other “power retailers.” The authors argue that this complaint might not be valid. In an analytical model of competing manufacturers and competing multiproduct retailers, the authors show that manufacturers may actually experience increased profits when a retailer gains an exogenous cost advantage over its rival retailer. Potential channel efficiencies exist when retailing costs are reduced. The authors illustrate that channel transactions based on bilateral bargaining capture these efficiencies by transferring market share to the more efficient retailer, thus increasing channel profits. In a bargaining relationship between a manufacturer and a retailer, the manufacturer realizes some of these enhanced efficiencies. The authors discuss the managerial implications for pricing in channels.
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