Strategic interactions between channel structure and demand enhancing services

In this paper, we investigate how opportunities to invest in demand enhancing services for a product line affect the interactions between a manufacturer and her dealer. Many demand enhancing services, e.g. after sales support, warranty repair etc. can be provided either by the manufacturer or they can be delegated to the dealer. We first show that when a manufacturer retains control of such services, the dealer will have an incentive to choose a decentralized organizational structure as a means of committing to non-product line pricing since this will encourage the manufacturer to invest more in demand enhancing services. We then consider a game that is played between the manufacturer and the dealer in which the dealer chooses between centralized (product line pricing) or decentralized (non-product line pricing) operations, and the manufacturer chooses between insourcing the services, i.e. providing them herself, or outsourcing them to the dealer. We find that the equilibrium depends on which, if any, channel partner has the ability to act as a Stackelberg leader. If the dealer can move first, then the equilibrium will always be outsourced services and centralized dealer operations. However, if either the manufacturer moves first or if neither partner can move first, then the equilibrium can be either insourced services and decentralized dealer operations or outsourced service and centralized dealer operations.