Reselling or drop shipping: Strategic analysis of E-commerce dual-channel structures

Abstract

Practical and anecdotal evidence indicates that the drop-shipping policy has been extensively adopted in electronic commerce (E-commerce) practice. However, how the different structures of dual channels affect the drop-shipping strategy of a retailer and supply chain efficiency has not been adequately investigated. To fill this research gap, this study performs a game-theoretic analysis of the drop-shipping strategy of a retailer under two practical dual-channel supply chain structures, namely, manufacturer-owned and retailer-owned online channel structures (MOS and ROS). Under each structure, the optimal pricing and the variations in profits are analytically presented with reselling or drop shipping in the corresponding channel. We show that under MOS, drop shipping can lower both wholesale and retail prices. By contrast, under ROS, drop shipping can decrease the offline retail price and the wholesale price but lower the online retail price only when the ratio of the unit fulfillment fee to overstock inventory is relatively low. The retailer prefers to adopt the drop-shipping policy under both MOS and ROS. Counterintuitively, the profits of both retailer and manufacturer are independent of the unit order fulfillment fee under MOS; however, under ROS, the profit of the manufacturer indicates a decreasing trend, whereas that of the retailer continuously increases with the unit order fulfillment fee. In terms of the performance of the entire supply chain, ROS dominates MOS when the proportion of brick-and-mortar (BM) shoppers is sufficiently high. In specific, beyond a certain service level, drop shipping in the retailer-owned online channel is preferred; otherwise, reselling in such channel is dominant. When the proportion of BM shoppers is moderate, MOS with drop shipping in the BM channel is the best choice for the entire supply chain. When the proportion of BM shoppers is low, MOS with reselling in the BM channel becomes the dominant option.