Agency Selling or Reselling? Channel Structures in Electronic Retailing

Forthcoming, Management Science

38 Pages Posted: 1 Mar 2012 Last revised: 5 Apr 2015

Vibhanshu Abhishek

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Kinshuk Jerath

Columbia University - Columbia Business School

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing

Date Written: January 2015

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, a format commonly referred to as agency selling. In this paper, we use a stylized theoretical model to 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? We find that agency selling is more effecient than reselling and leads to lower retail prices; however, the e-tailers end up giving control over retail prices to the manufacturer. Therefore, the reaction by the manufacturer, who makes electronic channel pricing decisions based on their impact on demand in the traditional channel (brick-and-mortar retailing), is an important factor for e-tailers to consider. We find that when sales in the electronic channel lead to a negative effect on demand in the traditional channel, e-tailers prefer agency selling, whereas when sales in the electronic channel lead to substantial stimulation of demand in the traditional channel, e-tailers prefer reselling. This preference is mediated by competition between e-tailers — as competition between them increases, e-tailers prefer to use agency selling. We also find that when e-tailers benefit from positive externalities from the sales of the focal product (such as additional profits from sales of complementary products), retail prices may be lower under reselling than under agency selling, and the e-tailers prefer reselling under some conditions where they would prefer agency selling without the positive externalities.

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

Suggested Citation

Abhishek, Vibhanshu and Jerath, Kinshuk and Zhang, Z. John, Agency Selling or Reselling? Channel Structures in Electronic Retailing (January 2015). Forthcoming, Management Science. Available at SSRN: https://ssrn.com/abstract=2013720 or http://dx.doi.org/10.2139/ssrn.2013720

Vibhanshu Abhishek (Contact Author)

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

Kinshuk Jerath

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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