Modeling Emerging-Market Firms’ Competitive Retail Distribution Strategies

Abstract

In emerging markets, the effective implementation of distribution strategies is challenged by underdeveloped road infrastructure and a low penetration of retail stores that are insufficient in meeting customer needs. In addition, products are typically distributed in multiple forms through multiple retail channels. Given the competitive landscape, manufacturers’ distribution strategies should be based on anticipation of competitor reactions. Accordingly, the authors develop a manufacturer-level competition model to study the distribution and price decisions of insecticide manufacturers competing across multiple product forms and retail channels. Their study shows that both consumer preferences and estimated production and distribution costs vary across brands, product forms, and retail channels; that ignoring distribution and solely focusing on price competition results in up to a 55% overestimation of manufacturer profit margins; and that observed pricing and distribution patterns support competition rather than collusion among manufacturers. Through counterfactual studies, the authors find that manufacturers respond to decreases in distribution costs and to the exclusive distribution of more preferred manufacturers by asymmetrically changing their price and distribution decisions across different retail channels.