Channel Pricing: A Retail Pass-Through Perspective

Abstract

The concept of retail pass-through, including own-brand and cross-brand pass-throughs, is critical for channel management strategies. With a classical common retailer channel, our paper provides a novel perspective on channel pricing through the lens of retail pass-through, synthesizing and extending the existing results. By employing the conduct parameter approach, our study identifies two important driving forces behind channel pricing strategies: vertical strategic effect and competition moderation effect. In a symmetric setting, extant research has sidestepped the (upstream) competition moderation effect stemming from the retailer’s various cross-brand pass-through behaviors by assuming symmetric-at-symmetric prices. However, we find that this horizontal effect can outperform the previously esteemed vertical strategic effect, and the relative strength between the two forces is the key to formulating optimal channel pricing decisions. We apply the unifying framework to two well-known strategic questions in channel pricing—channel price leadership and product line pricing—leading to results qualitatively different from the literature. Our study not only emphasizes the necessity to account for both vertical and horizontal effects in channel analysis but also calls for practitioners in channel management to recognize the crucial role of cross-brand pass-through behavior in determining optimal channel pricing policy.