The Impact of Channel Role on the Outsourcing of After-Sales Service with Asymmetric Retailer Competition

Abstract

After-sales service is support provided to a customer after purchase, which potentially leads to higher customer satisfaction and is demand-enhancing. Using a game-theoretic model in which a manufacturer determines its after-sales service and distribution channel strategies in the presence of two asymmetric retailers, we identify channel position as an important criterion in determining the outsourcing of after-sales service. Specifically, outsourcing to a third-party provider, due to its lack of channel interaction, is never an optimal choice for the manufacturer unless the third-party has a significant cost advantage in providing after-sales service. However, because of the channel role of the retailers, the manufacturer outsources to the large retailer rather than undertaking the after-sales service in-house, when the competing small retailer is less competitive and the cost of service provision is high. The trade-off between the manufacturer outsourcing the service and undertaking that in-house involves whether the manufacturer accommodates the small retailer in the market. When service provision is outsourced, the large retailer enjoys a lower wholesale price if the small retailer is present, and therefore the large retailer subsidizes the manufacturer to induce the manufacturer to accommodate the small retailer. However, the manufacturer, when undertaking the service by itself, forgoes the small retailer. Finally, we show that when the manufacturer adopts a multi-retailer distribution channel, the large retailer benefits because improved after-sales service increases demand and consumer valuation of the product. We also demonstrate the robustness of our key results in multiple extensions.

Keywords: supply chain management, channel strategy, after-sales service, game theory, asymmetric retailer competition