Retail Channel Management in the Presence of a Direct Channel and Strategic Customers

Problem definition: We study how a manufacturer shall manage the retail channel in the presence of a direct channel and strategic customers. We consider two periods, in which the manufacturer can sell through a single retailer or two different retailers in sequence with static or dynamic wholesale pricing. The retailer(s) sets the retail prices that the manufacturer’s direct channel needs to match, while the customers in each channel may strategically time their purchases. Academic/practical relevance: Although direct channel and strategic customer behavior are widely present in practice, how to manage the retail channel in such circumstances has not been investigated. Methodology: We derive complete subgame perfect Nash equilibria of this dynamic game. Results: We find that when the manufacturer can only sell through a single retailer, dynamic wholesale pricing is preferred when the market share of the retail channel is large, as it mitigates double marginalization. On the other hand, static wholesale pricing can alleviate strategic customer waiting, which is the most effective when the customers’ waiting incentive is intermediate. If the manufacturer can sell through two retailers, it can cause intertemporal competition between them, which may not only alleviate double marginalization but also counteract customer waiting. As such, the results change structurally. Selling through a single retailer can be optimal only under static wholesale pricing and only if the market share of the retail channel is small and the customers are moderately strategic. In the other scenarios, selling through two retailers with dynamic (static) wholesale pricing is optimal when the customers’ waiting incentive is weak (strong), and static wholesale pricing may be more preferred when the market share of the retail channel becomes larger. We also find that in the presence of strategic customers, the manufacturer fully controlling the retail prices may not be optimal for itself or the supply chain, particularly when the market share of the direct channel is large. Managerial implications: These results can be practically useful for managing the retail channel in the modern business environment.