Composite Contracts for Dual-Channel Supply Chain Coordination with the Existence of Service Free Riding

Abstract

This paper aims to investigate how to coordinate a dual-channel supply chain composing of a manufacturer and a retailer when customers utilize the retailer’s service to conduct free-riding behavior. Specially, we consider the crucial role of service in affecting customers’ valuation for a kind of experience product and establish a channel choice model by employing utility theory. Then, we analyze the optimal pricing and service decisions under decentralized and centralized scenarios. To achieve overall optimization, we propose three contract mechanisms, namely price hike (Mechanism 1), price hike with service cost sharing (Mechanism 2) and price hike with service cost sharing and surplus compensation (Mechanism 3). We reveal the way of price difference and service provision in affecting customer free-riding behavior. Besides, we find that the three mechanisms can reduce free-riding behavior to some extent. However, the extent varies under different mechanisms and is related to the cost-sharing fraction and the degree by which the manufacturer increases his online price. Further, we find that Mechanism 3 can realize overall optimization and members’ win–win situations. Finally, we conduct numerical examples to explore how different mechanisms affect supply chain efficiency. The results also provide managerial insights for dual-channel firms in practice.