Consumer free riding: Coordinating sales effort in a dual-channel supply chain

The Internet and e-commerce has allowed manufacturers to approach consumers directly, and has changed the structure of most supply chains from a single to a dual channel. Consumers can now shop for a product in an offline store and purchase it online at a lower price. This study considers the effects of free riding on sales effort in a dual-channel supply chain consisting of one manufacturer and one offline store. The results show that under deterministic demand, both the offline store's sales effort level and the dual-channel supply chain's profit are lower in the decentralized setting than in the centralized setting, and both decrease as the number of free-riding consumers increase. Finally, this paper proposes and analyzes a cost-sharing contract to coordinate a decentralized dual-channel supply chain to achieve beneficial outcomes for both parties. An extensive numerical study shows that this contract can improve the supply chain's efficiency under stochastic demand. (C) 2016 Elsevier B.V. All rights reserved.