Agency or wholesale? retail selling format in the presence of new manufacturer introduction

This paper studies a supply chain that consists of a retailer, an incumbent manufacturer, and a new manufacturer who is entering the market. Using game-theoretical method, we study how the retailer chooses its selling format, agency or wholesale, in the presence of new manufacturer introduction. It is found that, in the absence of new manufacturer introduction, the retailer chooses agency when the commission rate is high enough, while choosing wholesale when the commission rate is low enough. In the presence of new manufacturer introduction, however, the retailer wholesales from at least one of the two manufacturers, even when the commission rate is sufficiently high. We put forward two effects that potentially explain this finding. The first is the format differentiation effect, under which the retailer offers different formats to different manufacturers so as to relax competition. The second is the low-quality wholesaling effect, under which the retailer always wholesales from the manufacturer whose product quality is relatively inferior. Doing so enables the retailer to allocate the maximum profit from the supply chain. These two effects work no matter when the new manufacturer’s product quality is inferior or superior to the incumbent’s. Furthermore, this paper also discusses the case when the game proceeds over two periods and the case when the retailer offers a hybrid selling format, through which the robustness of the model is checked and more managerial insights are derived.