Retailer's channel structure choice: Online channel, offline channel, or dual channels?

Abstract

Extensive research has been done on a manufacturer's channel structure choice. In this paper, we study a retailer's channel structure choice and pricing decisions in a supply chain with a manufacturer and a retailer. To this end, we first derive the manufacturer's optimal wholesale price and the retailer's optimal retail price(s) under all three possible channel structures: a pure offline channel, a pure online channel, and dual channels. We then investigate how channel structure changes affect pricing decisions and what the optimal channel structure is for the retailer. Our main findings include the following. First, the retailer's optimal channel structure is a pure offline channel, dual channels, and a pure online channel if the customer acceptance rate for the online channel is low, medium, and high, respectively. Second, a pure offline retailer may strategically set up an online channel with little demand just to gain wholesale price reduction from the manufacturer. Third, in case that the manufacturer can disallow the retailer to sell online, we find appropriate fees the retailer can pay to achieve Pareto improvement for both.