Consumer free riding: Coordinating sales effort in a dual-channel supply chain

The Internet and e-commerce has allowed manufacturers to approach consumers directly, and has changed the structure of most supply chains from a single to a dual channel. Consumers can now shop for a product in an offline store and purchase it online at a lower price. This study considers the effects of free riding on sales effort in a dual-channel supply chain consisting of one manufacturer and one offline store. The results show that under deterministic demand, both the offline store's sales effort level and the dual-channel supply chain's profit are lower in the decentralized setting than in the centralized setting, and both decrease as the number of free-riding consumers increase. Finally, this paper proposes and analyzes a cost-sharing contract to coordinate a decentralized dual-channel supply chain to achieve beneficial outcomes for both parties. An extensive numerical study shows that this contract can improve the supply chain's efficiency under stochastic demand.