Drivers and Implications of Direct-Store-Delivery in Distribution Channels
33 Pages Posted: 6 Sep 2013 Last revised: 5 Oct 2013
Date Written: September 4, 2013
Direct-Store-Delivery (DSD) is a channel arrangement in which a retailer allows a manufacturer to execute in-store operations such as product replenishment and merchandising. This paper offers a model based analysis of the economic drivers and implications of DSD for the retailers and manufacturers. We consider a distribution channel where two competing manufacturers sell their products to the consumers via a retailer. We find that DSD is an equilibrium channel arrangement when the products are neither fully differentiated nor close substitutes. When the products are differentiated, the retailer refrains from initiating DSD and when the products are close substitutes, it is the manufacturer(s) who is (are) not willing to adopt DSD. Furthermore, we show that when the products are close substitutes, although the retailer prefers implementing DSD with both manufacturers, due to manufacturers' incentives, a heterogeneous channel arrangement where the retailer implements DSD with only one manufacturer could emerge in equilibrium. In addition, we find that when products are close substitutes, the switch to a DSD channel could lower the wholesale prices despite the fact that the manufacturers internalize the additional in-store operational costs in DSD. While the wholesale price could increase or decrease, we find that the switch to a DSD channel always reduces retail prices which has positive impact on consumer demand.
Keywords: Direct Store Delivery, Retailing; Distribution Channels
Suggested Citation: Suggested Citation