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2 Assessing the Economic Value of Distribution Channels : An Application to the PC Industry

Evaluating proposed changes in channels of distribution and matching products to channels in multi-channel product markets is a hard task for the management of any company. Such policy-oriented issues cannot be addressed by methods such as controlled experiments in test markets – methods that are feasible for evaluating pricing and advertising decisions. In this paper, we measure the economic value of distribution channels in a multi-channel setting by estimating a structural model of demand across channels. We then use this model to simulate changes in the channel and product mix and measure their consequences for economic value. We provide an application of this policy simulation approach to the PC industry, which is characterized by multiple firms competing via a variety of channels. Using this approach we are able to assess the economic value of each channel to each firm and to its customers. Further, our analysis provides an economic rationale for different channel actions observed in this marketplace. We also simulate the effects of the HP-Compaq merger but go beyond a standard merger analysis by evaluating the effects of various potential channel actions co-incident with the merger.