Distribution Channel Choice in a Market with Complementary Goods

In many market situations - such as in shopping centers, grocery stores, industrial-goods distributors, and full line manufacturers - we see the marketing and distribution of complementary products. Sometimes the distribution function is handled by the manufacturer himself, and sometimes it is spun off to an independent distributor or middleman. This paper presents an economics-based model which shows incentives for integration or non-integration of the distribution function based on economies of scale and scope in distribution; complementarity in demand across products; and customers' valuation of the benefits of one stop shopping. Such factors explain why manufacturers of narrow product lines may choose to use independent middlemen as a distribution channel, even though that involves a loss of control over retail pricing. They also can explain why the development of a broader product line over time can be accompanied by a switch from a distributor channel to an integrated channel. The model thus extends our understanding of the forces determining distribution channel choice beyond that achieved by other models based on substitutable (rather than complementary) products.