Bricks or clicks

Abstract

Purpose – The purpose of this paper is twofold: to investigate performance of both manufacturer-owned channel and traditional retail channel when the manufacturer encroaches upon the traditional channel in different forms (brick-and-mortar and online form) under different market structures (Stackelberg and Bertrand). To examine the effect of acceptance of the online channel and travel cost on profits of two channels. Design/methodology/approach – The Hotelling model is employed to depict consumers ' channel choice behavior, where the consumer surplus captures travel cost, spatial distance and consumer heterogeneity in acceptance of the online channel. A game-theoretical framework is developed to determine the optimal encroachment form and market structure for both manufacturer-owned and traditional retail channels. Findings – This paper finds that, in either form of encroachment, Stackelberg market structure always outperforms Bertrand market structure, and channel choice significantly relies on parameters, i.e. consumer acceptance of the online channel and travel cost. Moreover, a Pareto zone is proposed in which both channels consider the strategy that the manufacturer opens bricks-and-mortar channel under Stackelberg market structure as the optimal strategy. Originality/value – The present work fills a theoretical and practical gap for a structured analysis of the channel performance when the manufacturer encroaches upon the incumbent retail channel in different forms and under different market structure.