Lecture 22
Channel Conflict and Solutions
1
Why Use Channel Intermediaries?
Without Intermediaries
Milk P1
Bread P2
C1
Reducing
Transaction Costs
ShampooP3
C2
Soap P4
C3
With Intermediaries
P1
P2
P3
P4
Wholesaler
or Retailer
C1
C2
C3
2
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


Inventory carrying


product demonstration, after-sales service
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 longterm impact and are the hardest among all
marketing strategy to change.
4
Types of Channel Intermediaries
Goodyear’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?
5
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?
7
Managing Retail Intermediaries
Channel 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
8
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
9
Channel Conflict and Coordination
Double Marginalization
C = 10
Demand for Goodyear Tiempo at your dealership
Manufacturer
Goodyear
W
First stage
Retailer
(Independent Dealer)
P
P
D
30
10
40
6
50
2
Second stage
Market
D(P)
10
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
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
0
200
200
40
6
10*6 = 60
20*6 = 120
180
50
2
20*2=40
20*2=40
80
30
10
X
X
X
40
6
0
180
180
50
2
10*2=20
30*2=60
80
11
W = 10
W = 20
W = 30
W = 40
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?
12
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.
13
Channel Conflict and Coordination
Horizontal 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.
14
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.
15
Channel Conflict and Coordination
Manufacturer 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….
16
Next Class



Project Day
I will be available for individual meetings
Preference for appointments