Coordinating a Supply Chain with a Manufacturer-Owned Online Channel: A Dual Channel Model under Price Competition

45 Pages Posted: 9 Apr 2009 Last revised: 13 Apr 2009

Jennifer Ryan

affiliation not provided to SSRN

Daewon Sun

University of Notre Dame

Xuying Zhao

University of Notre Dame

Date Written: December 23, 2008

Abstract

We consider a dual channel supply chain in which a manufacturer sells a single product to end-users through both a traditional retail channel and a manufacturer-owned direct online channel. We adopt a commonly used linear demand substitution model in which the mean demand in each channel is a function of the prices in each channel. We model each channel as a newsvendor problem, with price and order quantity as decision variables. In addition, the manufacturer must choose the wholesale price to charge to the independent retailer. We analyze the optimal decisions for each channel and prove the existence of a unique equilibrium for the system. We compare this equilibrium solution to the solution for an integrated system, in which the manufacturer owns both the online store and the retailer. To enable supply chain coordination, we then propose two contract schemes: a modified revenue sharing contract and gain/loss sharing contract. We show that such contracts enable the manufacturer to maintain price discrimination, selling the products in different channels at different prices. Finally, we perform a comprehensive numerical study to consider the impact of the model parameters on the equilibrium and to demonstrate the performance of the proposed coordination contracts. We conclude that coordination is most critical for products which are highly price sensitive and for systems in which the online and traditional retail channels are not viewed as close substitutes.

Keywords: eBusiness, Online Direct Channel, Coordination, Competition, Game Theory, Newsvendor Problem with Pricing

Suggested Citation

Ryan, Jennifer and Sun, Daewon and Zhao, Xuying, Coordinating a Supply Chain with a Manufacturer-Owned Online Channel: A Dual Channel Model under Price Competition (December 23, 2008). Available at SSRN: https://ssrn.com/abstract=1375225 or http://dx.doi.org/10.2139/ssrn.1375225

Jennifer Ryan

affiliation not provided to SSRN

Daewon Sun

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN New South Wales 46556-5646
United States

Xuying Zhao (Contact Author)

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN New South Wales 46556-5646
United States

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