Improve it or reveal it? Product innovation and demonstration decisions under different supply chain contract modes

Abstract

When consumers are uncertain about their choice of a product, the product innovation effort and the product demonstration level will significantly affect product sales. Under the impact of factors such as contract mode, channel competition, and product competition, the relationship between firms’ decisions on innovation effort and demonstration level will become more complicated. This study comprehensively models and analyzes the interaction between the manufacturer's product innovation effort and the retailer's product demonstration level in a dual-channel supply chain under either the agency contract mode or the wholesale contract mode. In our model, a manufacturer sells his innovative product through a retailer’s physical store under wholesale or agency contract mode, as well as his direct online channel. The results show that under two contract modes, the trend of the demonstration level is almost opposite. Moreover, the correlations between the innovation effort and the demonstration level decisions under the two contract modes are opposite. From the perspective of marketing strategy, when the potential market of the innovative product is not too small, the penetration strategy is preferred under the agency contract mode, whereas the skimming strategy is preferred under the wholesale contract mode. In certain conditions, two firms can achieve Pareto optimality by choosing the agency contract mode. Besides, we find that the consumer showrooming behavior makes two firms more likely to achieve Pareto optimality, while the manufacturer’s introduction of the online direct sales channel will not hurt the retailer, who can avoid the loss of profit by adjusting the product demonstration level decision.