Direct Marketing in Oligopoly

We consider a game in which symmetric manufacturers decide whether to set up sites (e.g., web sites) where consumers can buy their products directly. Following this decision, the manufacturers choose quantities to sell to the retailers, and then the manufacturers with direct-sales sites and retailers choose quantities to sell to the consumers. We show that since an increase in the number of retailers may drive the direct-selling manufacturers from the retail market, it may raise the retailers profit and reduce social welfare. Finally, we discuss two cases: an oligopolistic wholesale market and a market with price competition and differentiated products.