Suppliers’ online channel structure strategies under product innovation effect and spillover effect

Abstract

In this paper, we investigate how spillovers from online sales to offline sales and product innovation jointly affect suppliers’ optimal online channel structure strategies. By comparing equilibrium outcomes of the game between a supplier, an offline retailer and an online retailer in different scenarios, including the scenario without product innovation, the scenario with exogenous product innovation and the scenario with endogenous product innovation, we obtain some novel management implications. There exists a threshold curve such that when the supplier’s marginal operating cost is below the threshold curve, the supplier is better off establishing a direct online channel, otherwise, the supplier should introduce an independent online channel. Nonetheless, the threshold curve is not a monotonic function of the spillover coefficient, but a function that decreases first and then increases with the the spillover coefficient. Exogenous product innovation does not change the supplier’s optimal online channel structure strategy qualitatively, it leads to some quantitative changes, shifting the threshold curve upward. However, endogenous product innovation changes the position and shape of the threshold curve significantly and gives the supplier the flexibility to establish the direct online channel. This paper reveals an underlying trade-off between online channel operational efficiency and channel coordination, providing suppliers managerial suggestions on online channel structure strategies.