Choosing an online retail channel for a manufacturer: Direct sales or consignment?

Abstract

We analyze a manufacturer's e-channel decision problem in which the manufacturer selects a direct-sales channel or a third-party consignment channel to complement his existing physical retail channel. We accordingly investigate two possible dual channels: a PD system involving a physical channel and a direct e-channel, and a PC system consisting of a physical channel and a consignment e-channel. For each system, we examine both a sequential-move game and a simultaneous-move game, as the manufacturer can strategically decide to announce his pricing decision before the physical retailer or to make his pricing decision with no communication with the physical retailer. Our analytical results indicate that, if the manufacturer's unit operating cost in the direct e-channel or the e-tailer's revenue allocation ratio in the consignment e-channel is sufficiently small, then the manufacturer has an incentive to adopt an e-channel. The manufacturer can always gain a higher profit by announcing his pricing decision before the physical retailer. If the manufacturer aims at increasing the demand, then he may choose the simultaneous-move game. Moreover, when the manufacturer selects an e-channel to increase his profit, he should adopt a direct e-channel if his unit e-channel operating cost is below a certain threshold that is dependent on the e-tailer's revenue allocation ratio, and adopt a consignment e-channel otherwise. A similar managerial insight is drawn when the manufacturer intends to increase the demand.