Equilibrium analysis in dual-channels supply chain with dominant e-tailers

In the last decade, selling to end customers via online channels has played an increasingly important role for the rapid development of e-commerce. Unlike brick-and-mortar distribution channels, the electronic channel can endow e-tailers with more bargaining power over a manufacturer, in particular with respect to setting the wholesale prices. This paper models the strategic interaction between e-tailers, who compete (imperfectly) in the online channel(s) and a monopolistic manufacturer and allows, in contrast to the previous literature, that e-tailers have price-setting power vis-à-vis the manufacturer (who can still decide on which e-tailer(s) to supply. The paper investigates the performance of the manufacturer and the e-tailers in a model that incorporates a vertical variable (the magnitude of a cross-channel spillover between online and offline distribution channels) and a horizontal variable (the degree of e-tailer competition) and allows for a dominant e-tailer structure as well as a dominant manufacturer structure). It considers a two-stage game theoretical model that captures the two key factors and solves for an equilibrium. More specifically, the paper characterizes an equilibrium in the dominant e-tailer structure when the cross-channel spillover is positive and downstream competition is not that strong (as well as in the dominant manufacturer structure). The paper also compares the firms’ performances under the two different power structures (dominant e-tailer structure and dominant manufacturer structure) and investigates the magnitude of the e-tailers benefit that is related to a change in their bargaining power. In addition, the cross-channel spillover affects e-trailers’ payoffs positively while peer competition has a negative effect on their profits. This paper thus closes a gap as in the literature few papers have focused on the impact of powerful e-tailers on wholesale price decisions and highlight the importance that the e-tailer should take into account both the competition parameter and the cross-channel effect when taking measures that might affect the power structure.