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Dual Sales Channel Management with Service Competition

Hewlett-Packard Laboratories, Palo Alto, California 94304
Sabanci University, Istanbul, 34956, Turkey
Stanford University, Stanford, California 94305
kay-yut.chen{at}hp.com
mkaya{at}sabanciuniv.edu
oozer{at}stanford.edu

We study a manufacturer's problem of managing his direct online sales channel together with an independently owned bricks-and-mortar retail channel, when the channels compete in service. We incorporate a detailed consumer channel choice model in which the demand faced in each channel depends on the service levels of both channels as well as the consumers' valuation of the product and shopping experience. The direct channel's service is measured by the delivery lead time for the product; the retail channel's service is measured by product availability. We identify optimal dual channel strategies that depend on the channel environment described by factors such as the cost of managing a direct channel, retailer inconvenience, and some product characteristics. We also determine when the manufacturer should establish a direct channel or a retail channel if he is already selling through one of these channels. Finally, we conduct a sequence of controlled experiments with human subjects to investigate whether our model makes reasonable predictions of human behavior. We determine that the model accurately predicts the direction of changes in the subjects' decisions, as well as their channel strategies in response to the changes in the channel environment. These observations suggest that the model can be used in designing channel strategies for an actual dual channel environment.¹

Key Words: dual channels; direct channel; service competition; product availability; supply chain contracting; experimental economics
History: Received: June 30, 2006; accepted: February 19, 2007.

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