Under dual-channel structure, the free-riding behavior based on different service levels between online channel and offline channel cannot be avoided, which would lead to channel unfairness. This study implies that the dual-channel supply chain is built up by online channel controlled by manufacturer and traditional channel controlled by retailer, respectively. Under this channel structure, we rebuild the linear demand function considering free-riding behavior and modify the pricing model based on channel fairness. Then the influences of fair factor and free-riding behavior on manufacturer and retailer pricing and performance are discussed. Finally, we propose some numerical analysis to provide some valuable recommendations for manufacturer and retailer improving channel management performance.
In the e-commerce era, dual-channel structure composed of direct online channel and traditional retail channel is the first choice for many manufacturers to promote products, which also attracts widespread scholars. In academia, channel pricing is one of the core decision-making problems of dual-channel researches [
In dual-channel background, there are two types of free-riding behavior: one is that consumers buy product online but obtain experiential service at physical store and the other is that consumers get information service through network but finally purchase offline [
In general, service level of traditional channel is higher than that of online channel. Traditional retailer provides quality experiential service offline at high expenses, but manufacturer who controls online channel is the beneficiary because of consumers’ free-riding behavior under dual-channel structure. Clearly, due to the impact of free-riding behavior and double marginalization caused by dual-channel competition, retailer is faced with channel unfairness and serious decline in profits. It will increase channel pricing competition, strike a severe blow to the retailer’s promotion effort, and deteriorate channels relations [
Above all, in the context of dual-channel combined with free-riding behavior, it is worth discussing what pricing decision manufacturer should take to maximize the profits of supply chain and its own and how to coordinate dual-channel supply chain, when concerning the fact that the retailer not only is after profit maximization but also cares whether they are treated fairly.
The paper assumes that the manufacturer controls the direct online channel and the traditional retailer sells the same product through distributed traditional channel at the same time. Let
The basic hypotheses are as follows. Suppose that the manufacturer is a Stackelberg leader. The decision variables are wholesale price
In order to ensure that the demand of dual-channel is positive, the online channel price should meet the following condition:
Without the consideration of fairness, traditional retailer sets profit maximization as his decision-making goal. Given wholesale price
The profit function
There is an optimal price
Combining formula (
Given the optimal price
The decision-making problem can be described as formula (
There is a critical value of market demand share for online channel:
From Proposition
When retailer not only focuses on its own profit but also cares about the fairness of channel relationship, its decision-making goal turns into the perceived utility maximization. The retailer’s perceived utility
If retailer’s profits do not reach
If retailer’s profits are not less than
(1) When retailer encounters disadvantageous channel unfairness, if the wholesale price
(2) When retailer is faced with advantageous channel unfairness, if the wholesale price
The proof of Proposition
According to condition 1, condition 2, and the hypothesis
Considering channel fairness, given manufacturer’s pricing strategy
From Proposition
Given retailer’s optimal pricing response
Ultimately, the largest global profit of manufacturer
Since the objective function and the optimal decision variables contain many parameters and complex expressions, we illustrate propositions and deductions in this paper with the aid of numerical example simulations to get insight into the enlightenment of management. We set basic values of the various parameters as
Let the range of market share
The effect of market share and channel on price.
The effect of market share and channel fairness on profit.
From Figures
From Figure
Figures
Effect of fairness channel profit distribution on channel pricing.
Effect of fairness channel profit distribution on channel profits.
From Figure
Overall, taking fairness into consideration, the retailer’s profits are always higher than those of not considering fairness
Figures
Effect of service level and free-riding on channel pricing.
Effect of service level and free-riding on profit.
Figure
Overall, from Figure
Dual-channel structure studied in this paper includes horizontal competition between traditional channel and online channel and vertical competition between the upstream and downstream supply chain. In addition, free-riding effect that causes the imbalance of profits distribution between manufacturer and retailer is inevitable in dual-channel structure, and channel unfair phenomenon is outstanding. Combining with free-riding behavior, this paper builds a linear demand function and uses fairness revised price game model to discuss pricing strategy and revenue performance of manufacturer and retailer. Finally, from numerical analysis, we provide management recommendations for manufacturer and retailer.
Our research finds that when manufacturer’s online market share is large enough, whether considering retailer’s channel fairness or not, due to free-riding effect, manufacturer will always lower wholesale price in order to maintain retailer’s traditional channel operation and provide quality experience service for its consumers. But as traditional channel enhances service level, online channel takes much more service free-riding from traditional channel than what traditional channel takes on the opposite. Therefore, manufacturer gains increase with the service improvement of traditional channel, the retailer profits first increase and then decrease. In short, manufacturer’s equilibrium price based on channel fairness is below its equilibrium price ignoring fairness. Manufacturer is willing to lose some profits in order to achieve channel fairness, and at the same time retailer always gets more profits in fairness considering situation.
There are two channel unfairness cases that retailer faced, disadvantageous channel unfairness and advantageous channel unfairness. When retailer faces disadvantageous channel unfairness, retailer’s profits gained from fairness consideration could not make up manufacturer’s profits difference compared with ignoring channel fairness. In such case, taking fairness into account will make supply chain performance worse, and there is no contract that could coordinate the supply chain, so manufacturer would like to ignore channel fairness. However, when retailer encounters advantageous channel unfairness phenomenon, retailer revenue increase was significantly greater than the reduction in the earnings of manufacturers due to fairness consideration, which leads to performance improvement of supply chain. In this state, if manufacturer considers channel fairness and designs appropriate revenue sharing contract to coordinate profits distribution, the supply chain members would realize the Pareto improvement.
However, there are still some limitations in this paper. Firstly, we only analyze retailer’s fairness preference and assume that manufacturer is a rational decision maker. But in reality, manufacturer may also have channel fairness preference. In addition, under certain conditions, supply chain decision performance with fairness consideration still does not reach the optimal value of centralized decision-making. Therefore, the future may continue to study how could manufacturer design appropriate contract mechanism to coordinate the dual-channel supply chain when a variety of behavioral factors are concerned. At last, the topic of this paper comes from the actual market research, but we have limitation of the availability of great empirical data. As a result of empirical data limitation, we use mathematical derivation and numerical simulation methods to solve the problem and seek management proposals. If more field research data can be collected in the future, such dual-channel management research based on behavioral factors would make a big breakthrough.
Manufacturer’s decision problem is as follows:
When When
Similar to the case of advantageous channel unfairness.
The authors declare that there is no conflict of interests regarding the publication of this paper.
The authors are very grateful to the editor and the anonymous reviewers for their insightful and constructive comments and suggestions that have led to an improved version of this paper. This work was partially supported by the National Innovation Group Science Foundation, China (no. 71221061), International Major Project Supported by the National Natural Science Foundation, China (no. 71210003), the National Science Foundation of China (71271219 and 71071164), and Program for New Century Excellent Talents in University (NCET-11-0519).