The optimal channel structure with retail costs in a dual-channel supply chain

Abstract

This paper considers a dual-channel supply chain consisting of a monopoly manufacturer, an independent retailer and a continuum of heterogeneous consumers who are classified into two segments according to their channel preferences. Due to various activities undertaken in different channels leading to retail costs, we highlight the effect of retail costs (i.e. fixed, linear and quadratic costs) on the optimal channel structures for the manufacturer, consumers and society. Our results show that the retail cost greatly influences the optimal channel structures for different parties. First, the manufacturer's channel selection varies considerably across retail costs. Specifically, when there are variable costs (linear and quadratic costs): on the one hand, the manufacturer might give up the grocery encroachment strategy; on the other hand, some profitable strategies which are missed in the case with fixed cost are likely to be implemented. Second, both consumer surplus and social welfare are maximised in the manufacturer-owned online channel unless the linear costs are sufficiently high or the cost gap between different channels is large. Collectively, the optimal channel structure for the manufacturer is not always optimal for consumer surplus or social welfare.