Impact of package price elasticity and distribution channel structures in a complementary goods market

Abstract

This paper analyzes the impact of retail channel and direct channel on pricing, total profit and consumer benefit in a product-service complementary goods market, where a product and a service are used as a package.

Direct channel is where manufacturers and service providers sell their products or services independently. Retail channel is where service providers bundle their service with a product supplied by manufacturers and sell them as a package.

The analysis shows that the retail channel is always unfavorable for consumers. When retail channel is an equilibrium choice for firms, the price of package is always higher in retail channel than in a direct channel.

In contrast, firms can take the advantage of the retail channel under some conditions. Sometimes, additional revenue-sharing contract between manufacturers and service providers is required to have the retail channel as equilibrium. Package price elasticity decides such conditions along with the effect of price buffer in retail channel.

The findings and implications from this study can apply to telecommunications markets, e-Book markets and other product-service markets having the similar characteristics.