Manufacturer selling channel structure choice under retailer demand-enhancement investment with dual-purpose firms

Abstract

This paper studies a manufacturer’s selling channel structure choice in a supply chain wherein the firms may concern about consumer surplus. In addition, the retailer can make the demand-enhancement investment, the effect of which may spill over to the manufacturer, subsequently altering the manufacturer’s selling channel structure choice among the reselling channel (mode R), the direct-selling channel (mode M), and the dual channels (mode D). Several intriguing results are obtained. First, when the manufacturer concerns about consumer surplus, the manufacturer prefers mode R if both the retailer’s investment cost and the manufacturer’s concern for consumer surplus are either high or low, while choosing mode M if the investment cost is high and the concern for consumer surplus is relatively low. Conversely, the manufacturer may not choose mode M when the retailer concerns about consumer surplus. Besides, whether the manufacturer or the retailer concerns about consumer surplus, only mode R may arise as the jointly preferred channel choice for the firms. Second, mode R is more profitable for the supply chain when the manufacturer’s (retailer’s) concern for consumer surplus is sufficiently high, because the sales competition is weaker and the retailer’s investment incentive is stronger in mode R. Third, mode M cannot be optimal for consumer surplus and social welfare due to the absence of the retailer’s demand-enhancement investment. Finally, the manufacturer’s (retailer’s) increasing concern for consumer surplus does not necessarily improve consumer surplus and social welfare because of the effect of investment cost on the manufacturer’s equilibrium channel structure strategy.