Direct selling, reselling or hybrid? Manufacturer's sales channel strategies in the context of online product reviews

Online product reviews (OPRs) exert a significant influence on consumers' purchasing decisions and play a crucial role in shaping the profitability of firms within supply chains. This study delves into the complexities of a manufacturer's optimal sales channel strategy in the context of OPRs. We analyze three sales channel modes: (a) maintaining both online and traditional channels (Dual-Channel Mode, Mode D), (b) abandoning the direct channel to focus on the traditional resale channel (Traditional-Only Channel Mode, Mode SR), and (c) abandoning the traditional channel to focus on the online direct channel (Direct-Only Channel Mode, Mode SM). We develop game-theoretical models to analyze the interplay between the manufacturer's channel choices and the retailer's pricing strategies. Our analysis reveals that when the effectiveness of OPRs is substantial, the manufacturer tends to favor either Mode SM or Mode D. In contrast, when OPRs are less influential, Mode SR generally yields greater benefits. Interestingly, we find that increased OPR accuracy does not necessarily result in clear-cut advantages for the manufacturer. Specifically, when OPR accuracy is low, the manufacturer prefers Mode SR; however, when OPR accuracy increases, Mode D tends to lead to greater profitability. We extend our model to examine channel cost differentiation, multiple competing retailers, and endogenous online review manipulation. Our primary findings remain robust across these extensions. Our study provides valuable insights for manufacturers when determining their optimal channel strategies in the presence of OPRs.