A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel

This research aims to provide insights into the determinants of channel profitability and the relative power in the channel by considering consumer demand and the interactions between manufacturers and retailers in an equilibrium model. In a departure from the standard empirical channel literature, which assumes that manufacturers set wholesale prices unilaterally, we explicitly model the negotiations between manufacturers and retailers. To this end, we formulate a Nash bargaining game to determine wholesale prices and thus how margins are split in the channel. Equilibrium margins are thus a function of demand primitives and of retailer and manufacturer bargaining power. Bargaining power is itself a function of exogenous retail and manufacturer characteristics such as firm size and service level. The parties' bargaining positions are determined endogenously from the estimated substitution patterns on the demand side. Applying our model to the German ground coffee industry, we find that size is a key driver of bargaining power. We conclude that the growth of retailers over the past decade may indeed have strengthened their hand