The value of offline channel subsidy in bricks and clicks: an O2O supply chain coordination perspective

Abstract

This paper aims to explore a rarely studied mutual promotional effects, operational strategies and cross-channel subsidy policies in a two-stage/two-player online-to-offline (O2O) supply chain. The centralized, decentralized and coordination decision models are developed, analyzed and compared for O2O mode without offline subsidy, O2O mode with offline subsidy and the pure online/offline channel mode. The revenue sharing contract (RSC) and two-part tariff contract (TTC) with Nash bargaining game are incorporated into the coordination models as the coordinating mechanisms. The numerical and sensitivity analyses based on an industry representative product (a popular smart phone product) are conducted and the corresponding results are compared to derive managerial insights and practice implications. The key findings show that a coordination strategy with offline subsidy can create the highest value to a two-player O2O supply chain and its members. As far as whether RSC or TTC coordinating mechanism should be undertaken, it depends on the risk-taking attitude and the relative power of both players in the supply chain. With a focus on the O2O supply chain strategy exploration, this study amends the literature shortage problem and broaden the much-needed knowledgebase in the O2O supply chain coordination studies.