Pricing and sales-effort coordination facing free riding behaviors between a brick-and-mortar retailer and a platform store owned by the manufacturer

Abstract

We study a two-channel supply chain with a brick-and-mortar (BM) retailer, a manufacturer, and an e-commerce platform (ECP) store owned by the manufacturer. Some customers may physically examine the product in the BM store before buying from the ECP store. The so-called free-riding or showrooming effect lowers the BM retailer’s desired level of sales effort. To coordinate the BM retailer’s sales effort decision, we design a price-match and bi-directional compensation contract. In one direction, the BM retailer matches the lower ECP price to consumers with the proof and then receives partial compensation from the manufacturer for each unit sold with price match; in the other direction, the BM retailer shares with the manufacturer the revenue of each product sold with regular price. This contract is easy to implement because similar to the widely adopted revenue sharing contract, it only requires the BM retailer to reveal the sales information to the manufacturer and the bi-directional compensation mechanism provides good protection for both parties. We develop an extended Hotelling model to examine the performance of the contact. We show that this contract can fully coordinate the supply chain with exogenous prices through an analytical study, and it can achieve Pareto improvement in the endogenous pricing scenario numerically.