DUAL DISTRIBUTION CHANNELS - THE COMPETITION BETWEEN RENTAL AGENCIES AND DEALERS

Managerial decisions involving marketing channels are among the most c ritical that an organization must make. Part of the reason for this im portance is that relationships between manufacturers and their interme diaries usually involve long-term commitments that are difficult to ch ange. On the other hand, in order to respond to the realities of the m arket place, an organization must be ready to adapt its distribution p ractices-sometimes under considerable uncertainty about the long-term consequences. Such a problem faces the U.S. automobile industry, which has led manufacturers to experiment with various channel structures. When manufacturers first changed their distribution policies, they wer e clear about the short-term effect on sales, but were unsure about it s longer term impact on profitability. In this article, we develop a m odel to analyze the marketing of durable products through multiple cha nnels. Our analysis suggests that, oven though it was not apparent at the time, manufacturers were indeed behaving optimally when they chang ed their policies. Our model provides insights not only to automobile manufacturers but also to practitioners and academics who are interest ed in understanding the unique problems associated with marketing dura ble products through multiple channels. We develop a two-period model by assuming that a single manufacturer markets a durable product throu gh two retailers-a rental agency and a dealer. The rental agency focus es mainly on renting the product in a daily rental market while the de aler focuses on selling the product to a different set of customers in the sales market. To model the development of channels in the U.S. au tomobile industry, we analyze three different channel structures. The first structure, a separate channel, reflects the state of the industr y through most of the 1980s, when rental agencies were franchised sole ly to rent and dealers solely to sell the cars. In response to a decre ase in overall sales, manufacturers encouraged rental agencies to sell their ''slightly used'' rental cars in the consumer market, resulting in the second structure, an overlapping channel. Dealers did not like this arrangement, however, and in the next experiment, a buyback chan nel, some manufacturers began buying back used rental ears and selling them through dealers. In terms of the consumer side of the model, we assume that consumers are heterogeneous and have product valuations th at are distributed uniformly between a low and a high value. In additi on, they recognize that as the durable depreciates with use, its secon dhand market value decreases. While both sold and rented goods depreci ate with use, we assume, based on an analysis of market prices, that s old goods depreciate at a higher rate than rented goods. Given these d ifferent depreciation rates and consumers' underlying utility function s, we develop the market demand functions in the dealer's and rental a gency's markets. Then for each of the channel structures, we solve the intermediaries' and manufacturer's problems. The main contribution of this article is that it allows us to evaluate the profitability assoc iated with various channel structures for all the players in our analy sis-the dealer, the rental agency, and the manufacturer. In terms of t he intermediaries, we find that the overlapping channel is the most pr ofitable structure for the rental agency; on the other hand, it is the least profitable for the: dealer. In terms of manufacturer profitabil ity, our model suggests that the separate channel is the least profita ble, and the overlapping channel is the most profitable. It is interes ting to note that the distribution structure in existence today is mor e akin to a buyback channel. ntis strikes us as a compromise channel, which alleviates dealer concerns with the overlapping channel, and;Vet does not harm rental agencies as much as a separate channel, These ar e surprising results because conventional wisdom has been that the ove rlapping channel was competing away profits for all players. This sugg ests to us that automobile manufacturers were indeed on the right trac k when they began experimenting with the structure of their distributi on channels.