Now, let me just summarize what we've talked about in terms of horizontal free
riding and how this can be illuminated.
There's essentially three broad strategies that can be put into place in
a particular market to try and eliminate this problem between Chris and
Amy where Chris is the high price, high service seller, and
the customer goes to his store to get the information and
then goes to Amy's store to get the lower price.
The first thing that you could do is you could make sure that in different
territories, different products are available.
So give Chris some of the product line, and give Amy something else,
so there's no direct competition between them.
Related to that, you might need to think carefully about the appropriate level of
distribution intensity.
If a lot of horizontal free riding is going on, you might want to make
your distribution intensity a little bit lower and be more exclusive or
more selective, meaning that local retailers have a local monopoly.
And then finally, the other thing that you could do is you could introduce different
brands for different retailers.
So literally just call the product different names, so
Chris's product has a slightly different label on it than Amy's does, and
this again works against the problem of direct comparison,
which is an important component of horizontal free riding.
So now, let me summarize everything that we've been talking about so
far in this module with respect to conflict.
Here's the three rules of thumb that have been discovered through academic research
and to just generally what causes more conflict in a channel of distribution or
system of distribution.
So three things we're going to look at,
first of all are the length of the channel.
So how many players are there between the person who provides the product initially,
or creates it, and the person that needs up buying it.
Secondly, how much autonomy is there on the channel?
Are all the channel members owned by the corporate entity?
So they're all stores owned by Starbucks.
Are they mainly franchise?
So McDonald's might have franchised.
These are rather all their completely independent agents.
And then thirdly, how much density is there in the channel?
Is there only one retailer or distributor in the particular market?
Are there two or are there multiple?
So this is what the researchers found with respect to these three important factors.
So generally, as the channel gets longer and longer, there is just
more potential for conflict, and there's really one fundamental reason for this.
This is a term that was developed by a French economist many centuries ago,
and it is called double marginalization.
It's a fancy term, but it's a simple idea.
It says every time you add someone between the producer and
the end consumer, you're adding a markup and a layer of margin.
So if you have one retailer between the customer and the end, sorry,
between the manufacturer and the end user, there'll be two levels of markup,
from the manufacturer to the retailer, and then the retailer to the customer.
If you have two intermediaries, there will be three levels of markup, manufacturer
to the distributor, distributor to the retailer, retailer to the customer.
So as you link from the channel, you're always adding in additional markup to
the margin, and you're adding more people, so there's more potential for conflict.
That's fairly unambiguous.
Secondly, if you look at the label of autonomy from having completely-owned
distributors to franchise distributors to completely independent, again,
as people become independent, there's more and more conflict, the conflict increases.
So those two, I think, are fairly ensured, are fairly obvious.
The last one is lease, so until you hear the story, and
this is why I think it's interesting.
So the researchers who looked at this issue also looked at the density of
the channel.
Now, you have a fairly low level of conflict if there's just
one exclusive outlet for territory.
Of course, as you increase to two, the conflict goes up,
because now I'm in competition with that store in the territory next door.
He's stealing some of my customers, I'm stealing some of his.
However, what the researches noticed is interesting, is the level of competition
or conflict starts to decrease when density gets really, really large.
Why is that?
Well, it's because there's now an attribution problem.
If I see my market share is going down, and
I have eight different competitors in my local area that I'm competing against,
I don't really know which one of those guys is taking my market shares.
So paradoxically, when you have more density of retailers in a given location,
sometimes the overall conflict can go down.
Okay, the last little task I'd like you all to think about as you're
working through this material, and you're thinking about what it means,
both how channels get created in terms of who is doing what, the hypergrid,
the other elements of design like intensive versus exclusive versus
selective distribution, and finally, this whole area of minimizing conflict.
I think to bring it all together,
it would be good to have an exercise to percolate on.
What I'd like you to do is to try and
think about a company that really innovated in the area of distribution.
Either they took over some existing activity,
they eliminated the activity, they turned a hard good into a soft good,
they completely changed the way customers procure the product, and in so
doing, really developed an advantage over their competitors.
So try and think about that, because I think a lot of the really interesting
innovations that are going to occur in markets are going to be innovations around
the area of distribution and access to products and services.
Particularly, as I've said many times, but it bears repeating,
that there's about a billion of us running around on the planet, it will be more
than that soon who are carrying computers in their pockets that can have all kinds
of things distributed to us and things that we can also respond to.
[MUSIC]