Channel Differentiation in a Dual-Channel Supply Chain

Abstract

Problem definition: In this e-commerce age, majority manufacturers sell products through online channels in addition to retail channels. This leads to dual channel competition and channel conflict. One popular operation in practice to reduce channel conflict is through increasing channel differentiation. It can be achieved by providing different shopping experiences and creating minor differences for the same products between channels. We study the impact of this operation on each party of the supply chain. Academic relevance: Dual channel conflict is not a new problem and channel differentiation has been commonly observed in practice. However, surprisingly, as far as we know, this is the first paper to study the impact of increasing channel differentiation on the manufacturer, the retailer, and supply chain performance. Methodology: We formulate our problem as a pricing game between a manufacturer owned online channel and a traditional retail channel. We consider three commonly observed pricing sequences in practice: (i) the retailer is the price leader, (ii) the manufacturer is the price leader, and (iii) the retailer and the manufacturer set the prices simultaneously. Results: We find that increasing channel differentiation may not always benefit both parties in the supply chain. It always benefits the price leader but can hurt the price follower’s profit. Increasing channel differentiation benefits the price follower more when the differentiation level is low, benefits the price leader more when the level is medium, and benefits the retailer more when the level is high. Furthermore, Increasing channel differentiation does not always increase supply chain performance. Managerial implications: Our work sheds lights on whether or not a firm should encourage increasing channel differentiation. If a firm is the price leader, the firm should consider increasing channel differentiation. If a firm is the price follower, the firm should be more cautious in increasing channel differentiation.