Price and margin negotiations in marketing channels: The influence of strategic information transmission.

Abstract

Marketing channel members, i.e., manufacturers and distributors, commonly negotiate key terms of exchange such as prices and margins. These negotiations can have a significant impact on a channel member's profit stream over the duration of the business relationship. Despite the importance of these negotiations, channel negotiations have received relatively little attention. Previous research has focused on Nash's cooperative bargaining model although recent advances in noncooperative game theory offer new opportunities for modeling and testing negotiation behavior. Rubinstein (1982) extended Nash's (1953) noncooperative model to a sequential strategic approach where bargaining occurs in discrete time and negotiators make offers and counteroffers with time preferences denoted by discount factors or fixed costs. We adapt and extend a sequential strategic model (Grossman and Perry 1986) to describe bargaining behavior and outcomes in the context of marketing channels. The model involves a manufacturer and a distributor negotiating to establish the transfer price for a good in a one-sided incomplete information situation. The focus is on the forces that drive the two parties to bargain and reach an agreement on a specific price within a finite number of iterations. The baseline model examines how different levels of manufacturer uncertainty about distributor value (resale price to consumers) and opportunity cost of delay (denoted by a discount factor) influence the bargaining process and outcomes. The conceptual framework then empirically examines how incorporation of trust between parties, as well as opportunities for explicit communication, moderate bargaining behavior and outcomes. The predictions from the conceptual framework are tested in three laboratory experiments conducted in a channel negotiation scenario adapted from a popular pricing case study. In general, changes in the level of manufacturer uncertainty and opportunity cost of delay influenced the bargaining process and outcomes as predicted by the model. A reduction in manufacturer uncertainty reduced bargaining duration, increased manufacturer profits, and improved bargaining efficiency while an increase in opportunity cost of delay lowered bargaining duration but did not improve bargaining efficiency. Bargaining efficiency improved as the potential gains from trade increased. Variations in trust and the opportunity to communicate also had a significant impact on the bargaining outcomes.