COORDINATION AND MANUFACTURER PROFIT MAXIMIZATION - THE MULTIPLE RETAILER CHANNEL

This paper explores wholesale pricing behavior within a two-level vertical channel consisting of a manufacturer selling through multiple independent retailers. The introduction of multiple retailers is important for several reasons. These include: (1) the determination of optimal channel breadth; (2) an analysis of the optimality of channel coordination for all channel members; and (3) the determination of the distribution of each dyad's profits between manufacturer and retailer. The authors demonstrate the existence of a two-part tariff wholesale pricing policy, common to all retailers, that fully coordinates the channel. They then show that the manufacturer can generally obtain greater profits by setting a unique two-part tariff pricing-policy that does not coordinate the channel. Finally, the authors show that the fixed-fee component of either two-part tariff determines channel breadth, that is, the number of profit-maximizing independent retailers that are willing to participate in the channel.