In this section, we analyze manufacturers differing in their associated retail investment efficiency. That is, we assume that the cost of retail investment is different among brands (K2 ”=K1). However, we continue to assume that retail firms are symmetric. This implies that investment in one brand is cheaper than investment in the other brand, regardless of the retail firm undertaking the investment. We define the difference in the retail investment cost byK2≠K1 = >0.
A natural and realistic interpretation of these assumptions is as follows: The parameterKi
can be interpreted as the efficiency of retail marketing relative to manufacturer marketing in a certain brand. The efficiency of retail marketing usually depends on a manufacturer’s brand reputation in a market and the marketing skills of the retailer. If a firm’s brand reputation is well established in the market, retail investment might be inefficiently costly (relative to marketing by the manufacturer itself) and hence, the respective cost parameter Ki should be rather high. In contrast, if a manufacturer has recently entered a new market and retail companies are well-established in that market,Ki should be rather low.
Moreover, manufacturers not having any direct contact to their final customers and selling their products via retailers should be associated with a lowKi.55
Different retail marketing efficiencies among brands can appear, if an established brand is already present in the market (high Ki), while another brand is a new entrant or
55As already mentioned above, the microchip producer Intel largely relies on marketing by its down-stream retailers.
without a high brand reputation in this market (lowKi). This reflects the situation in the mobile phone industry as our leading example quite well. While the three largest mobile handset producers in 2007 (Nokia, Samsung, Motorola) covered almost 2/3 of worldwide sales, Apple was a newcomer in this market and LG as well as Palm only played a minor role (see Gartner, 2007). This also implies that the large producers already had established marketing channels and their products were well known, while the small and new manufacturers might have lacked a high brand reputation or had to arrange new marketing channels. Thus, for Apple, LG and Palm it was relatively more efficient to rely on marketing by a third party already active in the mobile phone market. Referring to the examples of ER in the mobile handset industry mentioned in the introduction, ER has been used by these rather small or unknown mobile handset producers.
Our main result for asymmetric brands is summarized in the following Proposition.
Proposition 3.3. [Asymmetric Brands] Suppose upstream manufacturers are asymmetric with respect to the brand specific investment technology parameter, K1 ”=K2, then:
(i) The parameter space of the N/N-equilibrium and the parameter space, where either the E/N- or the E/E-equilibrium occur does not change.
(ii) The parameter space where the E/N-equilibrium occurs increases to the ex-pense of the parameter space where the E/E-equilibrium occurs.
Proof. See Appendix.
Figure 3.2 illustrates the occurrence of the equilibrium outcomes for different values of , with =K2≠K1 and K =K1.
First, introducing asymmetric brands does not alter the parameter space of the N/N -equilibrium. The value of Ki matters only for a firm actually adopting ER, as otherwise no investment is undertaken. Hence, there is no change in the occurrence of the N/N -equilibrium. Moreover, the introduction of asymmetric brands keeps the parameter space, where either theE/N- or theE/E-equilibrium occurs, constant. This follows immediately from the preceding result.
Second, the introduction of asymmetric brands increases the space, where the E/N-equilibrium occurs and decreases the space of the E/E-E/N-equilibrium. Consequently, the asymmetric equilibrium occurs for a larger set of parameters and the E/E-equilibrium for a smaller set of parameters, the larger the asymmetry among brands. The intuition for this is as follows. Suppose, we observe the E/E-equilibrium and raise the cost difference K2≠K1 by increasing K2: For manufacturer 1’s decision, whether or not to adopt ER, nothing changes. But if the increase in K2 is sufficiently large, exclusivity might not be the optimal strategy for manufacturer2anymore and she chooses not to adopt ER. Hence,
the larger the cost difference K2≠K1 , the larger is the ‘E/N space’ to the expense of the ‘E/E space’. Notice that it is sufficient to introduce a very small asymmetry for the multiplicity of equilibria to disappear.
Figure 3.2: Asymmetric Brands: Illustration of the equilibrium distribution systems for different asymmetries among brands ( : 0, 0.25, 0.5, 1).
BCG (2006) argues that exclusive retailing arrangements are largely used by small mobile handset producers. Moreover, it can be observed frequently that ER is used directly after the introduction of a new mobile handset, while it is abandoned when the handset has been established in the market. A potential interpretation of these findings could be as follows. The relative efficiency of retail marketing is most likely higher for new handsets by rather small producers or by a new entrant in the market than for their well known and large competitors 1Ksmall/unkown < Klarge/established
2. This makes ER more attractive for new products or entrants than for established brands. Consequently, it is optimal for the former to adopt ER, while most of the latter refrain from such arrangements.
Figure 3.2 illustrates this in the context of our model. That is, the larger the difference in the retail marketing efficiency, the larger is the parameter space where the asymmetric equilibrium occurs. However, it could be argued, further, that once the new handset receives recognition in the market the relative retail marketing efficiency decreases. That is, the handset is better known, and its producer does not have to rely on marketing
investment by its retailer. This means, while ER is often a profitable strategy just after market entry, it is not profitable anymore after being present in the market for a longer time. In our model, this would imply that the difference in retail market efficiencies became smaller 1Ksmall/unkown ≠Klarge/established
2 ¿ and so has the parameter space in which the asymmetric equilibrium occurs.