Channel strategy and pricing in a dual-channel with competition

This study deals with the impact of channel strategy and channel format selection on the manufacturer’s, the retailer’s, the e-tailer’s, and the system-wide profits. We consider the problem of one manufacturer selling one product in the market through two competing channels: a physical channel (retailer) and an internet channel (e-tailer). We assume the manufacturer uses two commonly applied contracts in such a dual-channel structure: the wholesale-price-only (WPO) contract for the physical channel and the revenue-sharing contract for the internet channel. Under such a setting with heterogeneous and cross-channel competition, we model the decision-making of the dual-channel as a Stackelberg game and carry out equilibrium analysis. The strategic problem facing the manufacturer is to determine whether to take an integrated approach or a decentralized approach for its internet channel, that is to integrate the internet retailing into its operations or to let a third party e-tailer, e.g., Amazon.com or e-Bay.com, take over the virtual retailing. Numerical results show that the integrated strategy generates a lower e-tailing price and higher profit for the e-channel, while the cooperative decentralization generates a higher e-tailing price, lower revenue-sharing percentage, and higher system-wide profit.