The most obvious solution to double marginalization is to get channel members to perform their functions more efficiently, thus saving costs, or to be willing to take lower margins. This can involve a lot of time and effort, and at a minimum, it would certainly require a deep and thorough understanding of functions and their costs. Kraft food constantly faces an incentive management problem from double marginalization. For example, consider retail advertising, which is an effective way to increase sales volumes around major holidays and at other key weeks throughout the year. Kraft will often provide retailers with this information about the effectiveness of advertising so they're aware of its effectiveness. But since this is costly for the retailer to do, they may choose not to undertake this action, thus causing retailers to systematically under-advertise. What can Kraft do? Well, one is cooperative advertising, where the manufacturer offers to pay a portion of retail advertising costs to subsidize this expense. Savvy manufacturers like Kraft consider the costs of making customers aware, and the margins each channel member makes. And can arrive at an advertising subsidy that shares these costs in a way that incents the retailer to run local ads. The more common solution to the double marginalization problem is what is known as the multipart tariff. And this is a price policy that includes multiple components designed to incentivize various channel behaviors, while also generating an acceptable split of channel profits. So instead of charging a price for full bundles of services or multiple channel functions, price each part individually. So retailers will charge one price that includes stocking and merchandising the shelves. While another price takes out this rack job or role, which Procter & Gamble can pay someone else to do, or send in their own people to take care of it. So this is why sometimes you see the Coke guys in the soda aisle at the grocery store. This is why retailers might charge manufacturers extra, or copay, and share the cost of advertising. The idea is, if 3M wants extra service, then it pays for it. In other words, services and ancillary functions are decoupled in a multipart tariff. Another solution is slotting allowances. For example, these allowances are often offered to Stop & Shop and H-E-B by major consumer packaged good manufacturers like Kraft to give retailers an incentive to provide shelf space for the new product introductions. DuPont offers service subsidies for automotive paint distributors to provide information, paint matching services and in-store support. And finally, another pricing solution is MSRP, or the manufacturer suggested retail price. MSRP acts to set a ceiling on prices, since pricing above MSRP on the package makes the distributor look bad. This also helps overcome the double marginalization problem. And many consumer packaged good companies will use this tool, from Frito-Lay to Sara Lee. These mechanisms reduce the distributor's incentive to increase their prices. And these are the dominant solutions to situations where you have both ownership transfer problems as well as double marginalization. The last problem is the issue of asymmetries, or differences between channel partners in the functions that they supply or you need. All channel partners do not perform the same set of channel functions, and they differ in their abilities to deliver on them at a fair cost. Additionally, some partners may be expected to execute on multiple desired channel functions. This is the basic problem of heterogeneity in the channel. So what's the problem with asymmetry? Well, there are asymmetries in capabilities, for example, small versus large book retailers. Finally, there are asymmetries in willingness. For example, Home Depot selling John Deere products may require education and servicing that Home Depot is not willing to provide. The fact of the matter is that channel pricing is never a simple or one-size-fits-all endeavor. Simple wholesale pricing across channels may seem fair, but doesn't incentivize partners who can do the work to do the work, because everyone is getting the same discounts. On the other hand, the channel strategists must strike a balance. Because unless there is a good justification of the margins relative to the cost of executing the channel function, the firm is at risk of being accused of illegal price discrimination. The Robinson-Patman Act warns against offering any kind of downstream members a differential advantage in pricing, particularly anything that might look anticompetitive to other firms.
