Pricing/service strategies for a dual-channel supply chain with free riding and service-cost sharing

Abstract

This paper considers a two-echelon supply chain, where a manufacturer sells products through both her own online channel and a traditional retailer. The retailer provides customers with some pre-sales services, which have positive impact on the market demand. The manufacturer's online channel free-rides the retailer's pre-sales services by sharing the retailer's sales effort cost. We investigate how free riding affects the two members' pricing/service strategies and profits when the dual channels use the differential and non-differential pricing scenarios, respectively. Additionally, our study presents the following findings. (i) Under the two pricing scenarios, the service-cost sharing contract can effectively stimulate the retailer to improve his service level while free riding occurred. (ii) If the degree of free riding is not very high, the manufacturer would share a larger proportion of service cost and the retailer would set a higher service level in the differential pricing scenario than in the non-differential pricing scenario. (iii) Under the differential pricing scenario, the service-cost sharing contract may avoid price competition between two channels. (iv) The non-differential pricing scenario is more beneficial to the retailer than the differential pricing scenario, but it is just reverse for the manufacturer and whole supply chain.