What Happens When Manufacturers Perform The Retailing Functions?

This study examines the effects of a relatively new channel structure on prices 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. In the cell phone category, brands with high market shares and inelastic demand did not change prices. In the watch category, the retail prices of relatively low‐end brands decreased while the prices of premium brands increased substantially after the switch. In addition to sales increases due to lower prices, we find that the channel structure change further caused sales to increase by 9–10% in the cell phone category and by 11–17% in the watch category. These results are consistent with previous theoretical predictions. We believe that our results provide important academic and managerial implications due to the increasing prevalence of manufacturer‐managed systems in the retail industry.