Channel Structures for a Dual-Purpose Firm: Direct, Retail, or Hybrid?

Abstract

The advance in e-commerce has provided firms with more options when designing their channel structures. The rise of ``beyond profit" managerial doctrine has also added complexity to channel design. Extending the literature in distribution channels that focuses on for-profit firms, this paper develops a stylized model to examine the channel design problem for a socially responsible manufacturer who pursues a dual-purpose objective---the manufacturer values both profit and consumer surplus. We compare three channel structures: direct selling (centralization), retailing only (decentralization), and the hybrid of both the direct and indirect channels. We show that double marginalization rooted in the retail channel can alleviate the manufacturer's loss in profit due to her pursuit of consumer surplus. Thus, compared to direct selling, retailing only may lead to a higher profit for the manufacturer (even when the manufacturer's direct channel is as efficient as the retail channel) and a higher conversion efficiency in boosting consumer surplus at the expense of the manufacturer’s profit. In the hybrid channel analysis, we show that the manufacturer's pursuit of consumer surplus leads to upward distortion of direct sales. Facing competition from direct sales, the retailer becomes less sensitive to the wholesale price, and the manufacturer has to reduce the wholesale price significantly to boost the retailer's order quantity, leading to serious downward wholesale price distortion when the consumer focus is high. Counterintuitively, we find that as the selling cost disadvantage in direct selling increases, the manufacturer with a higher consumer focus increases the wholesale price to rely more on direct selling. We also find that the hybrid structure may cause loss in profit due to price and quantity distortions, leading to lower manufacturer utility and conversion efficiency compared to the single-channel structures. We also provide several extensions to show the robustness of our main findings and offer further insights for channel design for dual-purpose organizations.

Keywords: channel structure, social responsibility, consumer surplus, game theory