An Explanation for Partial Forward Integration: Why Manufacturers Become Marketers

Manufacturers are seeking new ways to exercise control over how consumers experience their brands and the division of responsibility for manufacturing and marketing activities is getting rede ned in the process. A signi cant number of manufacturers now sell their products through company-owned stores as well as through independent retailers. More interestingly, many do so in direct competition with independent retailers (i.e., the retail stores are physically co-located). We derive conditions under which this strategy is viable and argue that through forward integration and investment in brand-speci c marketing e®ort, the manufacturer can achieve a form of resale price maintenance. That is, the prices charged by independent retailers competing against an integrated retailer (who invests in marketing e®ort) are higher than the prices charged when competition is between independent retailers only. In the partially integrated channel independent retailers bene t somewhat from the provision of a public good by the manufacturer; the manufacturer bene ts from control over retail decision variables. Moreover, we nd that the independent retailers' incentives to improve brand support increases. We also examine the retailing e±ciency of the manufacturer-owned store and show conditions under which demand at the company store complements or substitutes demand at independent stores. The basic results are preserved and additional insights obtained when we extend the model to consider phenomena such as market saturation e®ects (where an increasing number of retailers compete for a xed pie) and asymmetric demand at independent and integrated stores. Our model and results also speak to the Internet environment in which \partial forward integration" is fast becoming a norm, as in this medium all stores are by de nition co-located in the same physical space. Implications for retail management are discussed.