Dual-Channel Operations: Implication of Free-riding and Decision Bias

Abstract

We examine the effect of free-riding and decision bias on the dual-channel operations of a supply chain consisting of one retailer and one manufacturer, in which the manufacturer has an option to open the direct channel. Under the dual-channel scenario, we explore the role of the free-riding of the strategic customers, who firstly enter the store and then decide which channel to fulfill their demand, in (partially) enhancing their utility. When the manufacturer is sophisticated, we find that a higher free-riding degree and a higher strategic consumers’ proportion harm the retailer but may either benefit or harm the manufacturer, depending on the market conditions. Strategic consumers’ free-riding intensifies the horizontal price competition between two channels and exacerbates the double marginalization effect. There exists a win-win situation where the dual-channel strategy benefits both the manufacturer and the retailer. When the manufacturer is biased in the consumers’ acceptance of direct channel, we find that such bias increases the price competition, harms the manufacturer, but has no effect on the retailer’s profit. It intensifies the double marginalization effect and shrinks the range that the manufacturer chooses dual-channel strategy. We prove that the manufacturer’s insisting on his bias further expands these effects. More interestingly, both free-riding and manufacturer’s decision bias improve the consumers’ welfare.