A Manufacturer's Incentive to Open its Direct Channel and its Impact on Welfare

We consider a bilateral monopoly in which a manufacturer can open its direct channel that is less efficient than the existing retailer. We find the following results. The manufacturer opens its direct channel if its bargaining power over the existing retailer is weak. Opening the direct channel is detrimental to social welfare if this channel is efficient. Under a linear demand specification, if the equilibrium unit price under such opening is higher than that under no opening, the opening reduces social welfare under most of the parameter range of the efficiency of the manufacturer's direct channel.

Keywords: distribution channels, supplier encroachment, two-part tariff contract, welfare

JEL Classification: L14, L22, M11, D43

Suggested Citation: Suggested Citation

Matsushima, Noriaki and Mizuno, Tomomichi and Pan, Cong, A Manufacturer's Incentive to Open its Direct Channel and its Impact on Welfare (March 27, 2018). ISER Discussion Paper No. 1026, Available at SSRN: https://ssrn.com/abstract=3152700 or http://dx.doi.org/10.2139/ssrn.3152700