Date of Original Version

6-2007

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

The emergence of power retailers, such as Wal-mart, Best Buy, and Home Depot, has significantly changed the competitive landscape in the retailing industry over the past two decades. These power retailers frequently dominate other small retailers by charging lower prices (market dominance). Some also pursue the strategy of dominating the distribution channel by participating in setting the wholesale price (channel dominance). Indeed, in the case of Wal-mart, it exercises both market and channel dominance. Some upstream suppliers complain of being squeezed by the power retailers but at the same time are entering into close partnerships with them. Others, like Procter & Gamble, work in close cooperation with power retailers like Wal-mart, and acknowledge the benefits of the symbiotic relationship.

In this paper, we investigate the dominance strategy that a self-interested power retailer should pursue using a game-theoretic model. We also analyze how a strategy of dominance pursued by a power retailer, whether it is market dominance or channel dominance or dual dominance, affects other members of the channel. We show that market dominance tends to benefit the power and weak retailers alike at the expense of the supplier. Channel dominance benefits both the supplier and the power retailer without necessarily harming the weak retailer. Interestingly, dual dominance is not always the best strategy for a self-interested power retailer to pursue. We further show that even when the power retailer chooses to pursue the strategy of dual dominance, the weak retailer, as well as the supplier, can all become better off relative to the case where the channel is free of any dominance.

We also investigate consumer welfare and social welfare under the various types of dominance.

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