Investment Incentives and Relative Bargaining Power in a Multiproduct Distribution Channel

Abstract

Distribution channels featuring a common retailer that sells competing products and makes long-term, strategic investments are widespread. Within this context, the authors study retailer investments that have differential impacts on demand for competing products, which implies that the retailer might intentionally weaken a strong supplier's bargaining position with its investment by helping a weak supplier's product become more competitive in the consumer market. The analyses show that the relative bargaining powers of suppliers who do not directly interact determine investment efficiency, product market shares, firm and channel profit, and consumer surplus. This is in contrast with single-supplier settings, where the supplier's absolute bargaining power determines the retailer's investment incentives and resulting outcomes. In further contrast to single-supplier models, the findings show that investment can be efficient (inefficient) when the investing retailer has limited (full) bargaining power, inefficiencies can manifest as under- or overinvestment, and a supplier benefits when competing suppliers have more bargaining power vis-à-vis the retailer. The insights extend to supplier investments, product-specific investments, and repeated sequential investments and contribute to the ongoing discourse on channel management with multilateral bargaining, backward integration, dominant retailers and suppliers, and consumer surplus.