The role of advertising in the choice between reselling and agency selling

This article investigates the condition under which a manufacturer and a retailer in a two-member channel should adopt reselling or agency selling. Three game-theoretic models in which price and advertising decisions affect consumer demand are analyzed. Contrary to common belief about agency selling, we demonstrate that when manufacturer advertising greatly influences demand, reselling is the only feasible business model. Agency selling should be considered only when manufacturer advertising slightly impacts demand. Consequently, the manufacturer and retailer may prefer any of the three models and their preferences may differ. Agency selling can drive up retail prices and hurt channel members' profits.