Differentiation strategies in vertical channels

Abstract

PurposeThe purpose of this article is twofold: first, to review the literature in order to assess the opportunities and the possible welfare effects of differentiation strategies in the food market; and second, to analyse the current structure and organisation of the fresh produce market (fruit, vegetable, and salad) in the light of new product procurement, innovation, and differentiation policies carried out by retailers at the global level.Design/methodology/approachThe paper used a single dyadic case study across two countries (Italy and the UK): the primary producer is engaged in “partner” supply to a principal category management intermediary for channel leading multiple retailers.FindingsFirst, equilibrium in differentiated markets is not stable, and a welfare assessment is difficult. Second, a differentiation strategy in the market for fresh produce might benefit retailers more than in other sectors, which seem to be consistent with the theoretical findings. Third, when retailers engage in product differentiation it is more likely that channel relationships shift from collaborative to competitive types, with the power imbalance becoming the disciplinary means by which vertical coordination is achieved and maintained.Research limitations/implicationsThis article was based on a single case study.Practical implicationsFor suppliers it could be wise to agree to some inequity as the cost of doing business, especially when smart large retailers carry out successfully competitive strategies with positive spill‐over effects on the upstream firms.Originality/valueUsing the industrial economic literature on the effects of differentiation strategies (horizontal and vertical differentiation) on market structure, firms' performance, and welfare effects, this paper analyses case findings from a study in the fresh produce industry and will be of interest to those within the field.