Competition in dual-channel supply chains: The manufacturers' channel selection

Abstract

Innovative selling channels have brought about opportunities as well as challenges for upstream manufacturers. The past few years have witnessed both the success and failure of manufacturers with different channel strategies. To explore the rationale of different channel strategies in various contexts, we develop a model to analyze a manufacturer's channel selection decision among three channel strategies, i.e., a direct-channel strategy, a retail-channel strategy, and a dual-channel strategy consisting of both direct and retail channels. The model rests on the channel differentiation in terms of consumers’ channel preferences and operating costs of retail and direct channels. Specifically, we incorporate the action of a competitor and track down its influence on the focal manufacturer's channel preference. Our research clarifies the role of competition in the market and offers insights into the competitive nature of business in real life. Results show that the manufacturer's channel preference depends not only on the channels’ operating costs and consumers’ channel preferences but also on the competitor's channel strategy. We find that symmetric manufacturers can adopt asymmetric strategies as Nash equilibria and also that there are situations where no Nash equilibrium exists. We characterize the Nash equilibria in the channel selection game based on the exogenous parameters of the model.