Agency Selling or Reselling? Channel Structures in Electronic Retailing

Abstract:     
In recent years, online retailers (e-tailers) have started allowing manufacturers direct access to their customers while charging a fee for providing this access, commonly referred to as agency selling. In this paper, we answer a key question that e-tailers are facing: When should they use an agency selling format instead of using the more conventional reselling format? Using a theoretical model, we focus on the effects of two main factors on the resulting selling format in electronic retailing: competition among e-tailers, and reaction by the manufacturer due to the impact of the electronic channel on sales in traditional channels (e.g., brick-and-mortar retailing). Our results suggest that whenever sales in the electronic channel lead to a negative effect on demand in the traditional channel, e-tailers prefer to use agency selling, whereas when sales in the electronic channel lead to substantial stimulation of demand in the traditional channel, e-tailers prefer reselling contracts with manufacturers. This preference is mediated by competition among e-tailers - as competition between them increases, e-tailers prefer to use agency selling. Interestingly, under certain conditions, all market participants are better off when agency selling is used. We also analyze the effect that a new entrant has on the existing selling format in electronic retailing. We show that market entry can disrupt the existing format, and find the surprising result that, under certain conditions, consumers might face higher prices in the e-channel when there are competing e-tailers as opposed to when there is a monopolistic e-tailer.

Number of Pages in PDF File: 35

Keywords: multi-channel retailing, electronic commerce, distribution channel, cross-channel spillovers, agency model, retail competition, game theory.

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