Consumer Choice, Firm Performance and Channel Coordination in a Dual-Channel Distribution System
ABSTRACT
The expanding role of the Internet in consumer purchasing activities has created substantial new opportunities accessing to end-consumers. More and more manufacturers are beginning to sell products to potential consumers directly online while continuing to sell through the traditional brick-and-mortar retailers, a phenomenon leading to intense channel competition and conflicts. Using game theory, this research examines the effect of market segments, consumer choice and the acceptance of direct online channels on firm performance and the whole system’s profit. The analysis indicates that the addition of direct online channel does not necessarily harm the incumbent retailers. A win-win zone is proposed, in which both the manufacturer and the retailer benefit from the encroachment.
The expanding role of the Internet in consumer purchasing activities has created substantial new opportunities accessing to end-consumers. More and more manufacturers are beginning to sell products to potential consumers directly online while continuing to sell through the traditional brick-and-mortar retailers, a phenomenon leading to intense channel competition and conflicts. Using game theory, this research examines the effect of market segments, consumer choice and the acceptance of direct online channels on firm performance and the whole system’s profit. The analysis indicates that the addition of direct online channel does not necessarily harm the incumbent retailers. A win-win zone is proposed, in which both the manufacturer and the retailer benefit from the encroachment.
KEYWORDS
Dual-Channel, Encroachment, Consumer Choice, Win-Win Zone, Game Theory, Channel Coordination
Dual-Channel, Encroachment, Consumer Choice, Win-Win Zone, Game Theory, Channel Coordination
Cite this paper
Song, W. , Wang, R. , Fu, Y. and Peng, X. (2014) Consumer Choice, Firm Performance and Channel Coordination in a Dual-Channel Distribution System. American Journal of Operations Research, 4, 217-227. doi: 10.4236/ajor.2014.44021.
Song, W. , Wang, R. , Fu, Y. and Peng, X. (2014) Consumer Choice, Firm Performance and Channel Coordination in a Dual-Channel Distribution System. American Journal of Operations Research, 4, 217-227. doi: 10.4236/ajor.2014.44021.
References
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http://dx.doi.org/10.1016/j.ijpe.2005.06.006 [3] Berger, P.D., Lee, J., et al. (2006) Optimal Cooperative Advertising Integration Strategy for Organizations Adding a Direct Online Channel. The Journal of the Operational Research Society, 57, 920-927.
http://dx.doi.org/10.1057/palgrave.jors.2602069 [4] Yan, R. (2010) Product Brand Differentiation and Dual-Channel Store Performances of a Multi-Channel Retailer. European Journal of Marketing, 44, 672-692.
http://dx.doi.org/10.1108/03090561011032324 [5] Yan, R., Wang, J., et al. (2010) Channel Integration and Profit Sharing in the Dynamics of Multi-Channel Firms. Journal of Retailing and Consumer Services, 17, 430-440.
http://dx.doi.org/10.1016/j.jretconser.2010.04.004 [6] Lee, H.L., Padmanabhan, V. and Whang, S. (1997) Information Distortion in a Supply Chain: The Bullwhip Effect. Management Science, 43, 546-558.
http://dx.doi.org/10.1287/mnsc.43.4.546 [7] Kumar, N. and Ruan, R. (2006) On Manufacturers Complementing the Traditional Retail Channel with a Direct Online Channel. Quantitative Marketing and Economics, 4, 289-323.
http://dx.doi.org/10.1007/s11129-005-9003-8 [8] Business 2.0 (2000) 501 Blues. January, 53-56. [9] Cai, G., Zhang, Z.G., et al. (2009) Game Theoretical Perspectives on Dual-Channel Supply Chain Competition with Price Discounts and Pricing Schemes. International Journal of Production Economics, 117, 80-96.
http://dx.doi.org/10.1016/j.ijpe.2008.08.053 [10] Chiang, W.-Y.K., Chhajed, D., et al. (2003) Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design. Management Science, 49, 1-20.
http://dx.doi.org/10.1287/mnsc.49.1.1.12749 [11] Cattani, K.D., Gilland, W.G. and Swaminathan, J.M. (2004) Coornating Traditional and Internet Supply Chains. Kluwer Academic Publishers, Boston, 643-677. [12] Cattani, K.D., Gilland, W.G. and Swaminathan, J.M. (2006) Boiling Frogs: Pricing Strategies for a Manufacturer Adding a Direct Channel That Competes with the Traditional Channel. Production and Operations Management, 15, 40-56. [13] Hendershott, T. and Zhang, J. (2006) A Model of Direct and Intermediated Sales. Journal of Economics & Management Strategy, 15, 279-316.
http://dx.doi.org/10.1111/j.1530-9134.2006.00101.x [14] Arya, A., Mittendorf, B., et al. (2007) The Bright Side of Supplier Encroachment. Marketing Science, 26, 651-659.
http://dx.doi.org/10.1287/mksc.1070.0280 [15] Dumrongsiri, A., Fan, M., et al. (2008) A Supply Chain Model with Direct and Retail Channels. European Journal of Operational Research, 187, 691-718.
http://dx.doi.org/10.1016/j.ejor.2006.05.044 [16] Bernstein, F., Song, J.-S., et al. (2008) Bricks-and-Mortar vs. Clicks-and-Mortar: An Equilibrium Analysis. European Journal of Operational Research, 187, 671-690.
http://dx.doi.org/10.1016/j.ejor.2006.04.047 [17] Ofek, E., Katona, Z., et al. (2010) Bricks and Clicks: The Impact of Product Returns on the Strategies of Multichannel Retailers. Marketing Science, 1, 42-60. [18] Tsay, A.A. and Agrawal, N. (2004) Channel Conflict and Coordination in the E-Commerce Age. Production and Operations Management, 13, 93-110.
http://dx.doi.org/10.1111/j.1937-5956.2004.tb00147.x [19] Boyaci, T. (2005) Competitive Stocking and Coordination in a Multiple-Channel Distribution System. IIE Transactions, 37, 407-427.
http://dx.doi.org/10.1080/07408170590885594 [20] Seifert, R.W., Thonemann, U.W., et al. (2006) Integrating Direct and Indirect Sales Channels under Decentralized Decision-Making. International Journal of Production Economics, 103, 209-229.
http://dx.doi.org/10.1016/j.ijpe.2005.06.006 [21] Cai, G. (2010) Channel Selection and Coordination in Dual-Channel Supply Chains. Journal of Retailing, 86, 22-36.
http://dx.doi.org/10.1016/j.jretai.2009.11.002 [22] Yan, R., Guo, P., et al. (2011) Product Distribution and Coordination Strategies in a Multi-Channel Context. Journal of Retailing and Consumer Services, 18, 19-26.
http://dx.doi.org/10.1016/j.jretconser.2010.09.001 [23] Rhee, B. and Park, S. (1999) Online Store as a New Direct Channel and Emerging Hybrid Channel System. Working Paper, Hong Kong University of Science and Technology, Clear Water Bay. [24] Van den Poel, D. and Leunis, J. (1999) Consumer Acceptance of the Internet as a Channel of Distribution. Journal of Business Research, 45, 249-256.
http://dx.doi.org/10.1016/S0148-2963(97)00236-1 [25] Schoenbachler, D.D. and Gordon, G.L. (2002) Multi-Channel Shopping: Understanding What Drives Channel Choice. The Journal of Consumer Marketing, 19, 42-53.
http://dx.doi.org/10.1108/07363760210414943 [26] Reardon, J. and McCorkle, D.E. (2002) A Consumer Model for Channel Switching Behavior. International Journal of Retail & Distribution Management, 30, 179-185.
http://dx.doi.org/10.1108/09590550210423654 [27] Chen, K.-Y., Kaya, M., et al. (2008) Dual Sales Channel Management with Service Competition. Manufacturing Service Operations Management, 10, 654-675.
http://dx.doi.org/10.1287/msom.1070.0177 [28] Nash Jr., J.F. (1950) The Bargaining Problem. Econometrica, 18, 155-162.
http://dx.doi.org/10.2307/1907266 [29] Yan, R. (2008) Profit Sharing and Firm Performance in the Manufacturer-Retailer Dual-Channel Supply Chain. Electronic Commerce Research, 8, 155-172.
http://dx.doi.org/10.1007/s10660-008-9020-2 [30] Yan, R. (2011) Managing Channel Coordination in a Multi-Channel Manufacturer-Retailer Supply Chain. Industrial Marketing Management, 40, 636-642. [31] Chun, S.-H., Rhee, B.-D., et al. (2011) Emerging Dual Channel System and Manufacturer’s Direct Retail Channel Strategy. International Review of Economics & Finance, 4, 812-825. [32] Yan, R. and Pei, Z. (2009) Retail Services and Firm Profit in a Dual-Channel Market. Journal of Retailing and Consumer Services, 16, 306-314.
http://dx.doi.org/10.1016/j.jretconser.2009.02.006 [33] Ingene, C. and Parry, M. (2007) Bilateralmonopoly, Identical Competitors/Distributors, and Game-Theoretic Analyses of Distribution Channels. Journal of the Academy of Marketing Science, 35, 586-602.
http://dx.doi.org/10.1007/s11747-006-0006-0
[1] Anonymous (1999) Levi’s to Quit Selling Online. San Francisco Examiner. [2] Seifert, R.W., Thonemann, U.W., et al. (2006) Integrating Direct and Indirect Sales Channels under Decentralized Decision-Making. International Journal of Production Economics, 103, 209-229.
http://dx.doi.org/10.1016/j.ijpe.2005.06.006 [3] Berger, P.D., Lee, J., et al. (2006) Optimal Cooperative Advertising Integration Strategy for Organizations Adding a Direct Online Channel. The Journal of the Operational Research Society, 57, 920-927.
http://dx.doi.org/10.1057/palgrave.jors.2602069 [4] Yan, R. (2010) Product Brand Differentiation and Dual-Channel Store Performances of a Multi-Channel Retailer. European Journal of Marketing, 44, 672-692.
http://dx.doi.org/10.1108/03090561011032324 [5] Yan, R., Wang, J., et al. (2010) Channel Integration and Profit Sharing in the Dynamics of Multi-Channel Firms. Journal of Retailing and Consumer Services, 17, 430-440.
http://dx.doi.org/10.1016/j.jretconser.2010.04.004 [6] Lee, H.L., Padmanabhan, V. and Whang, S. (1997) Information Distortion in a Supply Chain: The Bullwhip Effect. Management Science, 43, 546-558.
http://dx.doi.org/10.1287/mnsc.43.4.546 [7] Kumar, N. and Ruan, R. (2006) On Manufacturers Complementing the Traditional Retail Channel with a Direct Online Channel. Quantitative Marketing and Economics, 4, 289-323.
http://dx.doi.org/10.1007/s11129-005-9003-8 [8] Business 2.0 (2000) 501 Blues. January, 53-56. [9] Cai, G., Zhang, Z.G., et al. (2009) Game Theoretical Perspectives on Dual-Channel Supply Chain Competition with Price Discounts and Pricing Schemes. International Journal of Production Economics, 117, 80-96.
http://dx.doi.org/10.1016/j.ijpe.2008.08.053 [10] Chiang, W.-Y.K., Chhajed, D., et al. (2003) Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design. Management Science, 49, 1-20.
http://dx.doi.org/10.1287/mnsc.49.1.1.12749 [11] Cattani, K.D., Gilland, W.G. and Swaminathan, J.M. (2004) Coornating Traditional and Internet Supply Chains. Kluwer Academic Publishers, Boston, 643-677. [12] Cattani, K.D., Gilland, W.G. and Swaminathan, J.M. (2006) Boiling Frogs: Pricing Strategies for a Manufacturer Adding a Direct Channel That Competes with the Traditional Channel. Production and Operations Management, 15, 40-56. [13] Hendershott, T. and Zhang, J. (2006) A Model of Direct and Intermediated Sales. Journal of Economics & Management Strategy, 15, 279-316.
http://dx.doi.org/10.1111/j.1530-9134.2006.00101.x [14] Arya, A., Mittendorf, B., et al. (2007) The Bright Side of Supplier Encroachment. Marketing Science, 26, 651-659.
http://dx.doi.org/10.1287/mksc.1070.0280 [15] Dumrongsiri, A., Fan, M., et al. (2008) A Supply Chain Model with Direct and Retail Channels. European Journal of Operational Research, 187, 691-718.
http://dx.doi.org/10.1016/j.ejor.2006.05.044 [16] Bernstein, F., Song, J.-S., et al. (2008) Bricks-and-Mortar vs. Clicks-and-Mortar: An Equilibrium Analysis. European Journal of Operational Research, 187, 671-690.
http://dx.doi.org/10.1016/j.ejor.2006.04.047 [17] Ofek, E., Katona, Z., et al. (2010) Bricks and Clicks: The Impact of Product Returns on the Strategies of Multichannel Retailers. Marketing Science, 1, 42-60. [18] Tsay, A.A. and Agrawal, N. (2004) Channel Conflict and Coordination in the E-Commerce Age. Production and Operations Management, 13, 93-110.
http://dx.doi.org/10.1111/j.1937-5956.2004.tb00147.x [19] Boyaci, T. (2005) Competitive Stocking and Coordination in a Multiple-Channel Distribution System. IIE Transactions, 37, 407-427.
http://dx.doi.org/10.1080/07408170590885594 [20] Seifert, R.W., Thonemann, U.W., et al. (2006) Integrating Direct and Indirect Sales Channels under Decentralized Decision-Making. International Journal of Production Economics, 103, 209-229.
http://dx.doi.org/10.1016/j.ijpe.2005.06.006 [21] Cai, G. (2010) Channel Selection and Coordination in Dual-Channel Supply Chains. Journal of Retailing, 86, 22-36.
http://dx.doi.org/10.1016/j.jretai.2009.11.002 [22] Yan, R., Guo, P., et al. (2011) Product Distribution and Coordination Strategies in a Multi-Channel Context. Journal of Retailing and Consumer Services, 18, 19-26.
http://dx.doi.org/10.1016/j.jretconser.2010.09.001 [23] Rhee, B. and Park, S. (1999) Online Store as a New Direct Channel and Emerging Hybrid Channel System. Working Paper, Hong Kong University of Science and Technology, Clear Water Bay. [24] Van den Poel, D. and Leunis, J. (1999) Consumer Acceptance of the Internet as a Channel of Distribution. Journal of Business Research, 45, 249-256.
http://dx.doi.org/10.1016/S0148-2963(97)00236-1 [25] Schoenbachler, D.D. and Gordon, G.L. (2002) Multi-Channel Shopping: Understanding What Drives Channel Choice. The Journal of Consumer Marketing, 19, 42-53.
http://dx.doi.org/10.1108/07363760210414943 [26] Reardon, J. and McCorkle, D.E. (2002) A Consumer Model for Channel Switching Behavior. International Journal of Retail & Distribution Management, 30, 179-185.
http://dx.doi.org/10.1108/09590550210423654 [27] Chen, K.-Y., Kaya, M., et al. (2008) Dual Sales Channel Management with Service Competition. Manufacturing Service Operations Management, 10, 654-675.
http://dx.doi.org/10.1287/msom.1070.0177 [28] Nash Jr., J.F. (1950) The Bargaining Problem. Econometrica, 18, 155-162.
http://dx.doi.org/10.2307/1907266 [29] Yan, R. (2008) Profit Sharing and Firm Performance in the Manufacturer-Retailer Dual-Channel Supply Chain. Electronic Commerce Research, 8, 155-172.
http://dx.doi.org/10.1007/s10660-008-9020-2 [30] Yan, R. (2011) Managing Channel Coordination in a Multi-Channel Manufacturer-Retailer Supply Chain. Industrial Marketing Management, 40, 636-642. [31] Chun, S.-H., Rhee, B.-D., et al. (2011) Emerging Dual Channel System and Manufacturer’s Direct Retail Channel Strategy. International Review of Economics & Finance, 4, 812-825. [32] Yan, R. and Pei, Z. (2009) Retail Services and Firm Profit in a Dual-Channel Market. Journal of Retailing and Consumer Services, 16, 306-314.
http://dx.doi.org/10.1016/j.jretconser.2009.02.006 [33] Ingene, C. and Parry, M. (2007) Bilateralmonopoly, Identical Competitors/Distributors, and Game-Theoretic Analyses of Distribution Channels. Journal of the Academy of Marketing Science, 35, 586-602.
http://dx.doi.org/10.1007/s11747-006-0006-0