What Happens When Manufacturers Perform the Retailing Functions

This study examines the effect of a relatively new channel structure on price and sales in a large department store, which in recent years has switched the management of many of its product categories from a traditional retailer-managed system to a manufacturer-managed system. We find that the change caused overall retail prices to decrease. However, there was significant heterogeneity in the response across brands. For the cell phone category that we study, brands with a high market share and inelastic demand have not changed prices. For another watch category, while retail prices of relatively low-end brands decreased, prices of premium brands even increased substantively/substantially after the change. In addition to sales increases due to lower prices we find that the system switch further caused the sales to increase by 9 – 10 percent for the cell phone category and 11 – 17 percent for the watch category. These results are consistent with the previous theoretical predictions. We believe that our results provide important academic and managerial implications due to the increasing prevalence of the manufacturer-managed system in the retail industry.