Dual channel or not? Implication of free-riding in altering consumer channel preferences

During the e-commerce era, manufacturers face strategic choices regarding the establishment of online (direct) channels alongside existing offline (retail) channels, particularly when selling inspection goods. Given that these decisions are significantly shaped by consumer channel preferences, this study incorporates the phenomenon of free-riding into the classic consumer choice model to examine how it influences the manufacturer's channel strategy by altering consumer preference for the direct channel. Our analysis yields several key insights. First, free-riding consistently intensifies price competition between the two channels, exacerbates double marginalization, and enhances consumer welfare. When pricing decisions are structured to allow both sophisticated and naive consumers to purchase from both channels, free-riding encourages the adoption of a dual-channel strategy at low levels but discourages it at high levels. However, when pricing decisions restrict specific consumer types to specific channels, free-riding always incentivizes the introduction of a direct channel. Third, our core findings remain robust in the presence of consumer heterogeneity—whether in their preference for direct channels or their degrees of free-riding. We further extend our analysis by relaxing key assumptions, which leads to new insights into strategic channel design. Our study contributes to a deeper understanding of the implications of free-riding in dual-channel retailing.