Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design

TLDR

E‑commerce has driven manufacturers to redesign traditional channel structures, and strong customer acceptance can prompt a manufacturer to open a direct channel that competes with its own retailers. The study models how customer acceptance of a direct channel as a substitute for traditional stores influences supply‑chain design. The authors construct a price‑setting game between the manufacturer and its independent retailer to analyze this effect. Direct marketing, though inefficient alone, can raise manufacturer profits by reducing double marginalization, indirectly increase retail profits through wholesale price cuts, and even boost the manufacturer’s share of cooperative profits when merely threatened, thereby benefiting both parties.

Abstract

The advent of e-commerce has prompted many manufacturers to redesign their traditional channel structures by engaging in direct sales. The model conceptualizes the impact of customer acceptance of a direct channel, the degree to which customers accept a direct channel as a substitute for shopping at a traditional store, on supply-chain design. The customer acceptance of a direct channel can be strong enough that an indepent manufacturer would open a direct channel to compete with its own retailers. Here, direct marketing is used for strategic channel control purposes even though it is inefficient on its own and, surprisingly, it can profit the manufacturer even when so direct sales occur. Specifically, we construct a price-setting game between a manufacturer and its independent retailer. Direct marketing, which indirectly increases the flow of profits through the retail channel, helps the manufacturer improve overall profitability by reducing the degree of inefficient price double marginalization. While operated by the manufacturer to constrain the retailer's pricing behavior, the direct channel may not always be detrimental to the retailer because it will be accompanied by a wholesale price reduction. This combination of manufacturer pull and push can benefit the retailer in equilibrium. Finally, we show that the mere threat of introducing the direct channel can increase the manufacturer's negotiated share of cooperative profits even if price efficiency is obtained by using other business practices.