Journal
MANAGEMENT SCIENCE
Volume 49, Issue 1, Pages 1-20Publisher
INST OPERATIONS RESEARCH MANAGEMENT SCIENCES
DOI: 10.1287/mnsc.49.1.1.12749
Keywords
supply chain management; channels of distribution; Internet/direct marketing; e-commerce; competitive strategy; game theory
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The advent of e-commerce has prompted many-manufacturers to redesign their traditional channel structures by engaging in direct sales. The model conceptualizes the impact-of customer acceptance of a direct channel, the degree to which customers accept a direct channel as a substitute for. shopping at a traditional store, on supply-chain design. The customer acceptance of a direct channel can be strong enough that an indepent manufacturer Would open a direct channel to, compete with its own retailers. Here, direct marketing is used for strategic channel control purposes even though it is inefficient on its own and, surprisingly, it can profit the manufacturer even when so direct sales occur. Specifically, we construct a price-setting game between a manufacturer and its independent retailer. Direct marketing, which indirectly increases the flow of profits through the retail channel, helps the manufacturer improve overall Profitability by reducing the degree of inefficient price double marginalization. While operated by the manufacturer to constrain the retailer's pricing behavior, the direct channel may-not always be detrimental to the retailer because it will be accompanied by a wholesale price reduction. This combination of manufacturer pull and push can benefit the retailer in equilibrium. Finally, we show that the mere threat of introducing the direct channel can increase the manufacturer's negotiated share of cooperative profits even if price efficiency is obtained by using other business practices.
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