Channel configuration in a complementary market under different power structures

Abstract This paper investigates the impact of channel selection power on the firms' channel configuration strategies in a market with two upstream manufacturers providing complementary products and one downstream retailer who can resell the products. Each manufacturer can sell its product either directly by incurring a selling cost or indirectly via the retailer, in which the decision is further dependent on the relative channel selection powers between itself and the retailer. We investigate three scenarios depending on the possible power structures among the firms and show that the equilibrium channel configuration strategy hinges highly on the channel selection power, the direct selling cost and the degree of complementarity between the two products. The manufacturer may prefer direct selling when it is more powerful than the retailer and both the direct selling cost and the degree of complementarity are relatively low. However, when the degree of products' complementarity is sufficiently high, a manufacturer would not choose direct selling even though there is no direct selling cost. We also show that a stronger channel selection power does not necessarily benefit but may occasionally hurt a manufacturer's profitability. For the manufacturer who does not have channel selection power before, the enhanced channel selection power endows it with more selling options but also encourages the leading manufacturer (who already has the channel power) to design a more aggressive channel configuration strategy that only benefits itself but hurts the others.