Determinants of Channel Profitability: Retailers’ Control over Product Selections as Contracting Leverage

Retailers control what products are offered on shelves, which may allow them to capture preferential contracts from their suppliers. I analyze the determinants of retail profitability through the lens of replacement threats, in which a buyer may obtain favorable pricing by threatening to source an input from a competitor. A theoretical analysis shows that retailers are less likely to benefit from replacement threats if they are better positioned to use other negotiation levers. An empirical analysis of the U.S. yogurt market confirms that larger buyers and regional retailers, with many stores in the market, benefit relatively less from replacement threats.