Sales effort free riding and coordination with price match and channel rebate

This paper studies sales effort coordination for a supply chain with one manufacturer and two retail channels, where an online retailer offers a lower price and free-rides a brick-and-mortar retailer’s sales effort. The free riding effect reduces brick-and-mortar retailer’s desired effort level, and thus hurts the manufacturer’s profit and the overall supply chain performance. To achieve sales effort coordination, we designed a contract with price match and selective compensation rebate. We also examined other contracts, including the target rebate contract and the wholesale price discount contract, both with price match. The numerical analysis shows that the selective rebate outperforms other contracts in coordinating the brick-and-mortar retailer’s sales effort and improving supply chain efficiency.

► Sales effort free-riding becomes more significant with the growth of e-commerce.
► On-line retailers’ free-riding behavior reduces brick-and-mortar retailer’s effort level.
► Thus it hurts the manufacturer’s profit and the overall supply chain performance.
► We designed a contract with price match and selective rebate to coordinate sales effort.
► It outperforms other contracts in improving supply chain efficiency under effort free-riding.