Game-Theoretic Coordination Mechanisms in Distribution Channels: Integration and Extensions for Models Without Competition

A significant game-theoretic literature on the coordination of distribution channels has developed over the past three decades. We provide an extensive analysis of an important subset of this literature, channels without competition. We review four major models that build on the initial work of Jeuland and Shugan (1983) – who developed a quantity-discount schedule that induces channel members to set price and non-price, marketing-mix variables (MM-variables) at channel-coordinating levels. Moorthy (1987) criticized their schedule's complexity, arguing for a simpler wholesale contract that induces coordination by avoiding double marginalization.Our focus is on coordinating mechanisms that enable decentralized channels to replicate an integrated channel's performance. To ascertain the complexity required for coordination, we build a general model that can be adapted to different channel structures. We employ all two-part tariffs that are embedded in the Jeuland–Shugan and Moorthy schedules; and we offer an original disquisition on how MM-variables affect the wholesale-price contract needed for coordination. Specifically, we show that:
• The impact of MM-variables on coordination pivots on which channel level provides them and whether their impact on sales is dyad-specific (e.g., co-op ads for a specific retailer) or multi-dyadic (e.g., national advertising that impacts multiple retailers).
• Coordination requires non-zero margins for all channel members when both channel levels have dyad-specific MM-variables.
• There are multi-dyadic MM-variables that a Jeuland–Shugan schedule cannot coordinate.
• We develop an original wholesale-price schedule that coordinates all non-competing channel structure/MM-combinations. The Jeuland–Shugan and Moorthy schedules are special cases of our schedule.

Figure optionsDownload as PowerPoint slideHighlights
► We analyze the game-theoretic literature on distribution without competition, focusing on coordinating mechanisms.
► Some channel structures achieve coordination despite non-zero margins at both channel levels.
► Marketing-mix effects depend on the channel level where they are provided and whether their impact is dyad-specific or multi-dyadic.
► The Jeuland–Shugan tariff cannot coordinate all channel structure/marketing-mix variables.
► We develop a two-part tariff that is always coordinating.