The reason is that retailers are forced to stock strong brands and therefore have
relatively less bargaining power in negotiating their wholesale prices with
manufacturers. In addition, retailers’ markups on these brands are strongly influenced
by the intensity of price competition among retailers (intrabrand competition). This
competitive pressure is more intense on strong brands since consumers select these
brands to form their perceptions of stores’ price competitiveness and are ready to
shift to lower price stores if retail price of these brands is not perceived as
competitive. Thus, intensive intrabrand competitive pressures discipline retailers’
price decisions on strong manufacturer brands. With Steiner’s words, “ when
consumers are more disposed to switch stores within brand than brands within store,
the manufacturer dominates his retailers, and vice versa when consumers are more
inclined to switch brands within store” (Steiner, 1984). Thus, while strong brands force
retailers to compete vigorously with each other and to retail at a small margin, weaker
and fringe brands do not face similar competitive price pressures. 7
While Steiner did not developed a formal model, his ideas contributed to the
development of an important stream of analytical models. Recently, Lal and
Narasimhan (1996) examined the stategic impact of brand advertising on margins
utilizing a game- theoretic model. Their results show that under some conditions a
manufacturer’ s advertising can lower the retail margin confirming Steiner’ s
hypothesis. Similar results are reached by other recent works (Sethuraman and Tellis,
2000; Ailawadi and Harlam, 2004).
To develop our framework, we begin with the hypothesis of an inverse relationship
between the strength of a brand and the retailer’ s margin. It is easy to understand the
implications of the Steiner’ s analysis for the upstream incentives to invest in non-
price strategies. The margin- depressing effect has key implications for the level of
advertising and R&D expenditures to build brands. To the extent that manufacturer
advertising and R&D affect not only final demand, but also margins at the retail level
(as well as the brand’s retail penetration and retailer’ s support to the brand) the
effectiveness of advertising and R&D will be higher than in a single- stage model. In
other words, if the margin depressing impact of nonprice strategies is additional to
their direct demand- creating effect, manufacturers face greater incentives to invest in
advertising and R&D to establish and maintain strong brands.
Albion (1983).
7 It is important to note that according to the theory of derived demand, prices and
margins at the retail and wholesale (factory) level are necessarily perfectly correlated
for both view of advertising. In other words, if advertising leads to increased market
power through product differentiation, both wholesale and retail prices increase and
both manufacturers and retailers get higher margins. Alternatively, if advertising does
not lead to higher differentiation and brand loyalty but spreads information and
increases price elasticity, then both wholesale and retail prices decrease resulting in
lower margins at both levels. By contrast, according to the Steiner’ s approach it is
possible that a manufacturer’ s advertising can have opposite effects on wholesale
price elasticity and retail price elasticity so that margins can move in opposite
directions.
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