Abstract
The expanding role of the Internet in consumer purchasing activities has created substantial new opportunities accessing to end-consumers. More and more manufacturers are beginning to sell products to potential consumers directly online while continuing to sell through the traditional brick-and-mortar retailers, a phenomenon leading to intense channel competition and conflicts. Using game theory, this research examines the effect of market segments, consumer choice and the acceptance of direct online channels on firm performance and the whole system’s profit. The analysis indicates that the addition of direct online channel does not necessarily harm the incumbent retailers. A win-win zone is proposed, in which both the manufacturer and the retailer benefit from the encroachment.
Highlights
Several substantial industry reports have been released demonstrating that there has been rapid expansion of electronic business channels [1]
Note that the wholesale price has to be stipulated to be not higher than the direct online sale price, that is w ≤ p1, in order to keep the retailer from purchasing through direct online channel or from other arbitrageurs
Proposition 5 reveals the fact that channel integration can definitely benefit the dual-channel supply chain, and the larger is the acceptance of direct online channel θ and αm, the higher is the extra-profit derived from αr channel integration
Summary
Several substantial industry reports have been released demonstrating that there has been rapid expansion of electronic business channels [1]. According to new statistical data from ComScore Networks, US online retail spending reached a record $56.781 billion in Q4-2012(the 4th quarter of 2012) This figure is up 14% from $49.698 billion in Q4-2011 and 35% from $41.936 billion in Q3-2012 (www.prnewswire.com). A manufacturer may be able to reach and sell to target consumers at a higher margin through direct online channels (Kumar and Ruan, [7]). The addition of direct online channels makes traditional retailers feel disenfranchised, making them react adversely, and gives rise to much fiercer competition. 2) Based on the aforementioned consumer choice, how does the addition of a direct online channel to the conventional channel affect profits of channel members and the system?
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