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Channel selection and pricing in the presence of retail-captive consumers


  • Khouja, Moutaz
  • Park, Sungjune
  • Cai, Gangshu (George)


We analyze channel selection and price setting of a manufacturer who has several distribution options which include selling through (1) a direct channel, (2) a manufacturer-owned retail channel, and/or (3) an independent retail channel. The manufacturer can use any combination of these options. We divide consumers into two segments: (1) a retail-captive segment whose consumers do not use the direct channel and (2) a hybrid segment whose consumers may use either channel. Hybrid segment consumers are heterogeneous in their channel preference. We identify the relative segment sizes and consumers' channel preferences under which different distribution strategies are optimal. Our analysis indicates that the most critical factor in channel selection in a vertically integrated supply chain is the variable cost per unit of product sold using the direct vs. the retail channels. In the presence of independent retailer, the size of the retail-captive consumer segment relative to the size of the hybrid consumer segment becomes a major factor in channel selection.

Suggested Citation

  • Khouja, Moutaz & Park, Sungjune & Cai, Gangshu (George), 2010. "Channel selection and pricing in the presence of retail-captive consumers," International Journal of Production Economics, Elsevier, vol. 125(1), pages 84-95, May.
  • Handle: RePEc:eee:proeco:v:125:y:2010:i:1:p:84-95

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    References listed on IDEAS

    1. Wei-yu Kevin Chiang & Dilip Chhajed & James D. Hess, 2003. "Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design," Management Science, INFORMS, vol. 49(1), pages 1-20, January.
    2. Xie, Jinxing & Ai, Song, 2006. "A note on "Cooperative advertising, game theory and manufacturer-retailer supply chains"," Omega, Elsevier, vol. 34(5), pages 501-504, October.
    3. Li, Susan X. & Huang, Zhimin & Zhu, Joe & Chau, Patrick Y. K., 2002. "Cooperative advertising, game theory and manufacturer-retailer supply chains," Omega, Elsevier, vol. 30(5), pages 347-357, October.
    4. Bernstein, Fernando & Song, Jing-Sheng & Zheng, Xiaona, 2008. ""Bricks-and-mortar" vs. "clicks-and-mortar": An equilibrium analysis," European Journal of Operational Research, Elsevier, vol. 187(3), pages 671-690, June.
    5. Kevin Chiang, Wei-yu & Monahan, George E., 2005. "Managing inventories in a two-echelon dual-channel supply chain," European Journal of Operational Research, Elsevier, vol. 162(2), pages 325-341, April.
    6. Yao, Dong-Qing & Liu, John J., 2005. "Competitive pricing of mixed retail and e-tail distribution channels," Omega, Elsevier, vol. 33(3), pages 235-247, June.
    7. Marcel Corstjens & Peter Doyle, 1979. "Channel Optimization in Complex Marketing Systems," Management Science, INFORMS, vol. 25(10), pages 1014-1025, October.
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    Cited by:

    1. Bian, Junsong & Guo, Xiaolei & Li, Kevin W., 2015. "Distribution channel strategies in a mixed market," International Journal of Production Economics, Elsevier, vol. 162(C), pages 13-24.
    2. Zhang, Jie & Zhang, Rachel Q., 2015. "Supply chain structure in a market with deceptive counterfeits," European Journal of Operational Research, Elsevier, vol. 240(1), pages 84-97.
    3. Ze-Bin Wang & Yao-Yu Wang & Jian-Cai Wang, 2016. "Optimal distribution channel strategy for new and remanufactured products," Electronic Commerce Research, Springer, vol. 16(2), pages 269-295, June.
    4. Cai, Gangshu (George) & Chiang, Wen-Chyuan & Chen, Xiangfeng, 2011. "Game theoretic pricing and ordering decisions with partial lost sales in two-stage supply chains," International Journal of Production Economics, Elsevier, vol. 130(2), pages 175-185, April.
    5. Wang, Wei & Li, Gang & Cheng, T.C.E., 2016. "Channel selection in a supply chain with a multi-channel retailer: The role of channel operating costs," International Journal of Production Economics, Elsevier, vol. 173(C), pages 54-65.
    6. Shao, Jing & Yang, Hangjun & Xing, Xiaoqiang & Yang, Liu, 2016. "E-commerce and traffic congestion: An economic and policy analysis," Transportation Research Part B: Methodological, Elsevier, vol. 83(C), pages 91-103.
    7. repec:eee:proeco:v:209:y:2019:i:c:p:103-111 is not listed on IDEAS
    8. Lu, Qihui & Liu, Nan, 2015. "Effects of e-commerce channel entry in a two-echelon supply chain: A comparative analysis of single- and dual-channel distribution systems," International Journal of Production Economics, Elsevier, vol. 165(C), pages 100-111.
    9. Chang, Cheng-Chang & Chen, Ju-Long, 2012. "A foreign expansion model with multi-site locations in service industries," International Journal of Production Economics, Elsevier, vol. 136(1), pages 102-109.
    10. repec:eee:proeco:v:213:y:2019:i:c:p:108-123 is not listed on IDEAS
    11. repec:eee:proeco:v:193:y:2017:i:c:p:31-39 is not listed on IDEAS
    12. Araneda-Fuentes, Cristina & Lustosa, Leonardo Junqueira & Minner, Stefan, 2015. "A contract for coordinating capacity decisions in a business-to-business (B2B) supply chain," International Journal of Production Economics, Elsevier, vol. 165(C), pages 158-171.
    13. Chen, Xu & Wang, Xiaojun, 2015. "Free or bundled: Channel selection decisions under different power structures," Omega, Elsevier, vol. 53(C), pages 11-20.
    14. S. Saha & S.P. Sarmah & Ilkyeong Moon, 2016. "Dual channel closed-loop supply chain coordination with a reward-driven remanufacturing policy," International Journal of Production Research, Taylor & Francis Journals, vol. 54(5), pages 1503-1517, March.
    15. repec:eee:jbrese:v:85:y:2018:i:c:p:209-225 is not listed on IDEAS
    16. repec:wsi:apjorx:v:35:y:2018:i:03:n:s0217595918500148 is not listed on IDEAS


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