New Product Design under Channel Acceptance: Brick-and-Mortar, Online-Exclusive, or Brick-and-Click

I n recent years, an increasing number of brick-and-mortar retailers have entered into the new brick-and-click era. Within this context, when a manufacturer presents a new product offering to a retailer, the ultimate decision is often made by the retailer regarding (1) whether to carry the new product, and (2) the channel outlet the product will be carried in (i.e., in-store only, online-exclusive, or brick-and-click). In response to this trend, we examine how a manufacturer may use product design to influence a dual-channel retailer’s outlet designation decision. This is the first study to investigate a manufacturer’s optimal product design strategy when a brick-and-mortar retailer expands online. We demonstrate that, to induce the retailer to carry a new product both offline and online, it may not always be optimal for the manufacturer to enhance product quality (compared with when the retailer only operates offline). With the online store addition, the retailer may also be incentivized to adjust his participation criterion to a level less than what is determined by his outside option.