Channel selection in a supply chain with a multi-channel retailer: The role of channel operating costs

In this paper we establish a linear demand model to explore the channel selection and pricing strategy in a supply chain that comprises a dominant multi-channel retailer, and a manufacturer that sells two horizontally differentiated products through its own direct channel and the retail channel, respectively. We find that the gap between the online and offline channels׳ operating costs is critical to the retailer׳s choice of its channel selection strategy. Multi-channel selling is the best choice for the retailer only when the cost-gap is narrow enough. Conversely, the retailer should only select the low-cost channel if the cost-gap is too large. In addition, we find that small product differentiation is more favorable to the manufacturer in a retailer-led supply chain as the retailer is forced to reduce its margin and retail price. Meanwhile, the manufacturer can benefit from a rise in the wholesale price and increasing demand in the retail channel. Finally, we consider the case where the manufacturer, instead of the retailer, acts as the decision maker for channel selection. We find that in theory the manufacturer will adopt the same channel selection strategy as the retailer in this case.