Channel Conflict and Coordination in the E‐Commerce Age

TLDR

Internet commerce and logistics advances have prompted firms to sell directly, creating potential channel conflict with existing resellers and significant distribution implications. The study develops a model of direct‑channel versus reseller dynamics to generate managerial insights, examines its structural properties, and explores industry‑observed adjustment mechanisms. The authors model the setting with inefficiencies and analyze adjustment mechanisms such as wholesale price changes, reseller commissions, and demand‑fulfillment concessions. Adding a direct channel does not always harm resellers when pricing is adjusted; both parties can benefit, especially when reseller commissions or demand‑fulfillment concessions align with each channel’s strengths.

Abstract

A number of factors, including developments in Internet‐based commerce and third‐party logistics, have led many companies to consider engaging in direct sales. Such a company may at once be both a supplier to and a direct competitor of any existing reseller partners (e.g., land‐based retailers), which can result in “channel conflict.” "This can have momentous implications for distribution strategy. To generate managerial insights into this important issue, we develop a model that captures key attributes of such a setting, including various sources of inefficiency. We examine these in detail and identify a number of counterintuitive structural properties. For instance, the addition of a direct channel alongside a reseller channel is not necessarily detrimental to the reseller, given the associated adjustment in the manufacturer's pricing. In fact, both parties can benefit. Finally, we examine ways to adjust the manufacturer‐reseller relationship that have been observed in industry. These include changes in wholesale pricing, paying the reseller a commission for diverting customers toward the direct channel, or conceding the demand fulfillment function entirely to the reseller. The latter two schemes could be mutually beneficial in that they achieve a division of labor according to each channel's competitive advantage.