The Implications of Category Captainship in the Presence of Retail Competition

Abstract

An increasing number of retailers delegate category management to one of their manufacturers known as a “category captain” (CC) who may make recommendations that include: assortment, pricing and shelving allocations, for all brands including its rival’s. Whilst there exists potential benefits of CC, there is growing concern around its competitive implications. However, this literature is limited and often models a setting with a monopolist downstream and/ or exogenous prices. We build on this literature by analysing the implications of various CC agreements in a setting with competing manufacturers upstream, selling their brands through two competing retailers downstream. The first main chapter examines the delegation of retail pricing and assortment decisions to a manufacturer. We show that the intensity of retail competition determines whether CC benefits consumers, or leads to reduced variety and higher consumer prices. The second chapter allows for the upstream rival brand to act strategically. We show that a single manufacturer and retailer always have an incentive to form an agreement under which the CC makes recommendations on retail prices, and that consumers benefit from increased consumer surplus through lower prices. However, we find that the profits of the outsider manufacturer and retailer decrease. The third chapter builds upon these findings, using sequential game theory to examine the incentives for the outsider firms to implement a counterstrategy by also forming a CC agreement. We show that the level of inter and intrabrand competition determine whether CC will result in a decrease in consumer surplus through higher prices, and lower profits for the outsider manufacturer, or be pro-competitive. Overall, our results suggest that CC agreements may provide an alternative mechanism to other vertical agreements to harm consumers through higher prices, and potentially disadvantage outsider firms particularly in markets where competition is intense.