Price and Margin Negotiations in Marketing Channels: An Experimental Study of Sequential Bargaining Under One-sided Uncertainty and Opportunity Cost of Delay
Manufacturers and distributors in marketing channels commonly establish prices, margins, and other trade terms through negotiations. These negotiations have significant impact on channel members’ profit streams over the duration of the business relationship. We consider a situation where a manufacturer and an exclusive, independent distributor are negotiating the transfer (wholesale) price of a new product. The transfer price should lie between the manufacturer’s production cost and the maximum resale price that the distributor can charge end consumers (consumers’ reservation price). We assume that the negotiations occur in an incomplete and asymmetric information environment such that the manufacturer is uncertain about the consumers’ reservation price, whereas the distributor knows it precisely because of proximity to the consumer. The negotiation is time-sensitive because of the threat of potential competitive entry. Both parties have identical opportunity costs of delay in reaching agreement.