Complementarity and Bargaining Power

Bargaining power in vertical channels depends critically on the 'disagreement profit' or the opportunity cost to each player should negotiations fail. In a multiproduct context, disagreement profit depends on the degree of substitutability among the products offered by the downstream retailer. We develop an empirical framework that is able to estimate the effect of retail complementarity on bargaining power, and margins earned by manufacturers and retailers in the French soft-drink industry. We show that complementarity increases the strength of retailers' bargaining position, so their share of the total margin increases by almost 28 per cent relative to the nocomplementarity case.