Retailer's Market Power and the Optimal Channel Strategies of a Manufacturer In
KAIST Graduate School of Management
Se Hak Chun
Seoul National University of Technology
November 1, 2010
KAIST Business School Working Paper Series No. 2010-011
Even though many manufacturers today are increasingly adopting dual channels to sell their products through their traditional retail channels and their own direct on-line channels, there are still few theoretical studies on manufacturers' optimal channel management strategies and pricing strategies in electronic commerce. Previous studies tend to rely on simulation approaches or empirical approaches and their methods are not sufficient to draw equilibrium prices for a dual-channel supply chain design. As well, previous studies on channel management have tried to analyze a manufacturer's channel management strategy from the perspective of channel conflict between a manufacturer and a retailer; thus, they tend to focus on pricing strategies of the manufacturer and start from an assumption that there are both offline and online channels initially.
This paper begins by asking a question why both channels exist at the same time. We are particularily interested in a manufacturer's optimal channel strategies when a manufacturer sells its products through both a retail channel and its direct online channel. Then, under what conditions do both a traditional retailer and a vertically integrated direct channel coexist or when does a manufacturer use a traditional channel only? Also, when may a manufacturer dispense with an existing retailer and use a direct online channel only?
We investigate these questions from the perspective of customer choice behavior considering several factors, including the degree of the consumer's online convenience and the degree of customer heterogeneity between a traditional retail channel and on-line channel. We discuss how these are related to a manufacturer's channel strategies and pricing strategies in an electronic market enviroment. In particular, we consider the retailer's market power (or competitiveness in a retail market), which have been rarely considered in previous studies. We discuss the channel conflict issue from a different view of the retailer's market power. Traditional approaches have focused on the fact that offline markets are larger than online, so the retailer has more bargaining power. Our perspective also considers the opposite point of view. In particular, we examine how this retailer's market power is related to a manufacturer's channel strategy, pricing strategy, strategic behaviors and channel conflict. We also discuss strategic implications on the market player's behavior when a manufacturer adds a direct online channel.
Number of Pages in PDF File: 43
Keywords: Economics of IS, Electronic Commerce, Channel Management, Retailer Market Power, Channel Conict, Clicks-and-Mortar, Online and O ine Channel, Optimal Prices, Equilibrium Prices, Supply Chain Management