Does the Addition of a Marketing Intermediary Increase the Manufacturer's Profits?

Abstract

This article will examine whether adding a marketing intermediary can increase a manufacturer's profits, as compared with marketing the product directly to the consumer. Previous studies suggest that cooperation between manufacturers and retailers provides both parties with benefits such as cost reduction, reduction of inventory levels and improved customer service, in addition to higher profits than each party would have achieved on its own. Clearly, the common interests of the two parties surpass the potential conflicts between the parties and these common interests should dictate the nature of the collaboration. Herein, using a mathematical model, we show that under certain conditions a manufacturer of durable consumer goods in a vertically integrated supply chain can increase profits by decentralizing, i.e. adding a retail distribution channel. This result holds even if the retailer does not bring unique skills or knowledge to the relationship or if there is no competition in the product market. We deal with two problems simultaneously: The channel coordination problem and the Coase problem (although we focus on markets in which the manufacturer must sell products rather than lease them). We use a numerical example to demonstrate an application of our model and we offer directions for future research.