With exponential growth in e-commerce sales, many retailers are increasing their use of online channels and social media for marketing and customer service operations. For example, Amazon and JD have launched livestreaming channels to promote their products via live video. However, the selling formats chosen by online retailers may differ. Shedding light on an important but underexamined issue in e-commerce, Albert Y. Ha of HKUST and colleagues explore how an online retailer chooses one channel structure over another.
Two main channel formats are available to online retailers. The first is the agency selling format, whereby the retailer operates a marketplace and charges manufacturers a commission rate to sell directly to consumers. The second is the reselling format, whereby the retailer buys from manufacturers and resells to consumers itself. Some online retailers operate only one of these channels, whereas others operate both. The use of both channels by a manufacturer to sell to consumers offers a third channel format—the dual channel approach.
To date, the authors note, there has been a lack of research on “the case in which the retailer uses the dual channel format for the same product sold by the same manufacturer, even though this is quite common in practice.” The researchers set out to fill this gap. To explore how online customer service and promotional efforts affect an online retailer’s choice of channel structure for selling its products, they develop a game-theoretic model in which a manufacturer sells a product through an online retail platform. This model is “consistent with the practices of online retailers like Amazon and JD,” in the authors’ words.
“We derive conditions under which each of the three channel structures (agency channel, reselling channel, and dual channel) emerges in equilibrium,” the researchers explain. Their results indicate that the dual channel structure offers firms the flexibility to shift sales between the agency and reselling channels, “which could increase the retail platform’s incentive to exert service effort.” In addition to this “channel flexibility” effect, the researchers find that “the wholesale price in the reselling channel is reduced because of the addition of the agency channel even when both channels are equally efficient.”
They also find that an increase in either the commission rate or the cost of service effort, which usually hurts the manufacturer, could actually benefit the manufacturer if such a change induces a shift from the use of a reselling channel to the use of dual channels. They also find that a decreased commission rate or an increased cost of service effort, both of which usually hurt the online retail platform, could instead benefit it if they induce the same shift in the equilibrium channel structure.
These novel findings, the researchers say, provide “a plausible explanation of why many manufacturers sell the same products through both the agency channel and the reselling channel of the same platform, which cannot be explained by existing theories in the literature.”
As well as contributing to the emerging literature on the selling formats of online retail platforms, this study offers practical insights for managers tasked with deciding on a platform’s channel policies. Specifically, the findings will help firms and their managers “to understand and make channel choice decisions in supply chains with manufacturers selling through online retail platforms.”