The bright side of having an enemy

Mushegh Harutyunyan, Baojun Jiang

Research output: Contribution to journalArticle

Abstract

Conventional wisdom suggests that more intense competition will lower firms’ profits. We show that this may not hold in a channel setting with exclusive retailers. We find that a manufacturer and its retailer can both become worse off if their competing manufacturer and retailer with quality-differentiated products exit the market. Put differently, in a channel setting, more intense competition can be all-win for the manufacturer, the retailer, and the consumers. Interestingly, a high-quality manufacturer can benefit from an increase in its competitor’s perceived quality, e.g., due to favorable product reviews from consumers or third-party rating agencies. In other words, a manufacturer may prefer a strong rather than a weak enemy and the manufacturer can have an incentive to help its competitor to improve product quality or to remain in the market. Furthermore, we show that a multi-product monopolist manufacturer with an exclusive retailer may make higher profits by spinning off a product into a competing manufacturer that has its own retail channel, even without accounting for any proceeds from the spinoff.
Original languageEnglish
JournalJournal of Marketing Research
Volumeforthcoming
Publication statusPublished - 2019

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Retailers
Competitors
Profit
Rating agencies
Monopolist
Product review
Exit
Retail
Incentives
Perceived quality
Spin-off
Wisdom
Product quality
Differentiated products

Keywords

  • Competitive Strategy
  • Market Exit
  • distribution channel
  • Double Marginalization
  • Pricing
  • Entry Deterrence

Cite this

The bright side of having an enemy. / Harutyunyan, Mushegh; Jiang, Baojun.

In: Journal of Marketing Research, Vol. forthcoming, 2019.

Research output: Contribution to journalArticle

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AB - Conventional wisdom suggests that more intense competition will lower firms’ profits. We show that this may not hold in a channel setting with exclusive retailers. We find that a manufacturer and its retailer can both become worse off if their competing manufacturer and retailer with quality-differentiated products exit the market. Put differently, in a channel setting, more intense competition can be all-win for the manufacturer, the retailer, and the consumers. Interestingly, a high-quality manufacturer can benefit from an increase in its competitor’s perceived quality, e.g., due to favorable product reviews from consumers or third-party rating agencies. In other words, a manufacturer may prefer a strong rather than a weak enemy and the manufacturer can have an incentive to help its competitor to improve product quality or to remain in the market. Furthermore, we show that a multi-product monopolist manufacturer with an exclusive retailer may make higher profits by spinning off a product into a competing manufacturer that has its own retail channel, even without accounting for any proceeds from the spinoff.

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