Title: Online expansion: is it another kind of strategic manufacturer response to a dominant retailer?

Authors: Rongyao He; Yu Xiong; Yonghong Cheng; Jiachen Hou

Addresses: School of Economics and Business Administration, Chongqing University, No. 174 Shazhengjie, Shapingba, Chongqing, China ' Norwich Business School, University of East Anglia, Norwich, NR4 7TJ, UK ' School of Economics and Business Administration, Chongqing University, No. 174 Shazhengjie, Shapingba, Chongqing, China ' Strathclyde Business School, University of Strathclyde, 16 Richmond Street, Glasgow G1 1XQ, Scotland, UK

Abstract: The issues of channel conflict and channel power have received widespread research attention, including Geylani et al.'s (2007) work on channel relations in an asymmetric retail setting. Specifically, these authors suggest that a manufacturer can respond to a dominant retailer's pricing pressure by raising the wholesale price for a weak retailer over that for the dominant retailer while transferring demand to the weak retailer channel via cooperative advertising. But, is online expansion another kind of strategic manufacturer's optimal response to a dominant retailer? In this paper, we extend this work by adding a direct online selling channel to illustrate the impact of the manufacturer's internet entry on firms' demands, profits, and pricing strategies and on consumer welfare. Our analysis thus includes a condition in which the manufacturer can add an online channel. If such an online channel is opened, the channel-supported network externality will always benefit the manufacturer but hurt the retailers. Consumers, however, will only benefit from the network externality when a dominant retailer is present and will be hurt when both retailers are symmetric.

Keywords: online channels; channel-supported network externality; distribution channels; channel conflict; channel power; game theory; pricing pressure; wholesale price; dominant retailers; weak retailers; cooperative advertising; online selling channels; manufacturers; internet entry; profitability; pricing strategies; consumer welfare.

DOI: 10.1504/IJMTM.2016.075836

International Journal of Manufacturing Technology and Management, 2016 Vol.30 No.1/2, pp.1 - 18

Received: 23 Nov 2013
Accepted: 18 Jul 2014
Published online: 08 Apr 2016 *

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