We consider an optimization problem for a dual-channel supply chain with one manufacturer and one retailer under stochastic demand. The manufacturer and retailer play a Stackelberg game. The manufacturer, acting as the leader, decides the total inventory capacity, wholesale price and selling price in the direct channel. The retailer, acting as the follower, decides the order quantity and retail price in the traditional channel. By solving the optimization problem, we find that given the selling price in the direct channel and wholesale price, the retailer’s decisions on order quantity is similar to that for the newsvendor problem. Meanwhile, the manufacturer’s decision on the inventory allocated to the direct channel also has the similar structure. Besides, we show that in our analysis framework, the retail price in the traditional channel, wholesale price and total inventory capacity can be presented in closed-forms. Finally, we numerically study the effects of the demand uncertainties and price sensitivities on the optimal solutions and performance. It is interesting to show that the retailer’s expected profit may be unexpectedly increased when the demand variability in the traditional channel increases, due to the competition between two channels.

In this paper, we consider a dual-channel problem with one manufacturer and one retailer. The manufacturer, acting as the Stackelberg leader, sells a single type of product through a traditional channel to the retailer and/or through a direct channel to customers. The retailer, acting as the follower, orders the products from the manufacturer and sells to the customers. We consider a hierarchical pricing decision process and find the joint optimal strategy for three prices: the wholesale price, the retail price in the traditional channel, and the selling price in the direct channel. Our framework involves various operational strategies, e.g., dual channels, a single traditional channel, a single direct channel, equal-pricing strategy in which the wholesale price is equal to the selling price in the direct channel, price-matching strategy in which the product is priced the same on the website and the retail store, etc. We provide criteria to identify different operational strategies, and compare the performance of the strategies. Our results show that operating dual channels is optimal for the manufacturer only under some conditions, and equal-pricing strategy and price-matching strategy may not always be optimal for the manufacturer. Our results supplement the findings for dual-channel problem in the literature in a comprehensive model framework.