Competing on Ports

I recently read an article on Gwadar Port. While the article mentions how the Baloch people are resisting the establishment of the port which they fear is another attempt at taking away the benefits of local resources by the Punjabi dominated disposition (Gwadar is one of the most impoverished districts and people have to consume contaminated water in absence of safe drinking water supply), it also highlights another element of geo-strategic politics. China is sponsoring the Gwadar port to get access to the Persian Gulf and reduce the distance to Europe. It aims to develop a highway consisting of rail, road and fiber between Gwadar in Pakistan and China. This has also alarmed the Indian officials who are vary of China's 'String of Pearls' policy and its attempt to undermine India's security. China also developed Colombo port and recently docked its submarine there. Also, another issue troubling India is access to Afghanistan owing to its troubled relations with Pakistan. India had thus planned to develop Chabahar Port in Iran close to the Gwadar Port as an alternative access to Afghanistan and Central Asia in 2003. Delayed for long, it hopes to speed up its efforts on the same. 

It is interesting to note that as economics become more important consideration in international relationships, Asia is looking at developing ports to realize the true potential of maritime trade. It would also be interesting to see how the whole situation pans out. As of now, China has moved faster in putting up a footprint all around India.

Choice between Integrated and Decentralized Distribution System

I was reading a research paper by McGuire and Staelin (1983) titled 'An Industry Equilibrium  Analysis of Downstream Vertical Integration' (McGuire, T. W., & Staelin, R. (1983). An industry equilibrium analysis of downstream vertical integration. Marketing Science, 2(2), 161-191.). 

The paper talks about the role of product substitutability in deciding whether a firm should choose to sell through a franchise or own-outlet. It is an important choice that many businesses have to make. While there are several factors like synergies, capital availability, regulation, etc., the paper uses game theoretic framework to understand economic benefits of the two approaches. The paper follows from the notion of bilateral monopolies and considers a model of two manufacturers selling differentiated but competing products and their decision about selling it through franchises/ private dealers (Decentralized i.e. D) or own store (Integrated i.e. I). This leads to 4 different possibilities II, ID, DI and DD. With assumptions of static linear demand and cost functions, different behaviors of the two players are considered. The decision variable is price. It was shown that II was the Nash Equilibrium when there is lower product substitutability and DD when there is high product substitutability. The consumers are always better off (lower prices) when the two players don't collude. Addition of a retail layer between cooperating manufacturers and consumers is of little help. With lower product substitutability, the condition is similar to that of a monopolist who would have no incentive of sharing the channel profit with an intermediary.

The paper gives us an understanding of a potential reason why firms may choose to decentralize and lose control even when the own-store outlets can work at the same efficiency as franchise. This is observed for highly substitutable products like fast-food, soft-drinks, etc. Though, it is also important to consider the other factors that may be governing this decision. Another fascinating aspect is that it considers channel management, a marketing problem from the lens of micro-economics.