Direct selling, agent selling, or dual-format selling: Electronic channel configuration considering channel competition and platform service

Highlights

• Electronic channels for direct, agent, or dual-format selling are configured.

• Channel competition, platform service and cross-channel effect are considered.

• Competition intensity and transaction fee impact factor are vital in channel choice.

• An electronic channel consisting solely of direct selling will never be selected.

• Results are robust for positive entry cost, endogenous pricing and data value.

Abstract

Flourishing e-commerce has prompted manufacturers to design different electronic channel structures for consumers' electronic shopping needs. As a result, the study of e-commerce channel configuration decision has become an important research topic. Toward this end, we establish three-stage sequential game models and investigate a manufacturer’s electronic channel configuration strategy from the perspective of both the manufacturer and the whole supply chain. In addition to a traditional channel, the main innovation of this paper is the framework involving three different electronic channel structures: the first is direct selling, in which the manufacturer sells products directly to consumers; the second is agent selling, in which the manufacturer sells products through a third-party platform; and the third is dual-format selling, in which the manufacturer sells products through both direct selling and agent selling. In these frameworks, the manufacturer’s selling price and the platform’s transaction fee are obtained by backward induction. Another innovation is the simultaneous incorporation of key factors such as the cross-channel effect, channel competition and platform service into our discussion. Sensitivity analysis is carried out and numerical examples are given to reveal the impact of exogenous parameters on equilibrium outcomes and channel configuration strategies both theoretically and numerically. Our analysis shows that channel competition intensity and transaction fee impact factor are critical to determining channel configuration. When these two factors are both either large or small, dual-format selling is the optimal configuration; otherwise, agent selling is preferred. In addition, we find that an electronic channel consisting solely of direct selling will never be chosen. In the extended models, we also find that our main results are robust for cases of positive entry cost, endogenous pricing, and demand-driven data value.

Introduction

With the rapid development of network information technology and the rise of e-commerce, increasing number of consumers are starting to choose electronic shopping to satisfy their needs. WWW.AskCI.com (2018), the population of Chinese netizens had reached 802 million, putting the rate of internet penetration at 57.7% (WWW.AskCI.com, 2018). In the UK, e-commerce turnover was expected to exceed EUR 200 billion by 2019 (EC.com.cn, 2019). Not surprisingly, to adapt to the shift in consumer shopping, many well-known companies have begun to establish electronic channels in addition to their original channels. This is referred to as “manufacturer encroachment”. Manufacturer encroachment can be easily done by setting up official websites or franchising to third-party platforms, such as JD.com, Gome.com.cn, or Amazon.cn (Liu, Guan, Wang, & Ma, 2019). Therefore, the traditional, single-channel supply chain is gradually evolving into a hybrid supply chain system where traditional and electronic channels coexist, especially in the electronics and appliances industry.

There are three potential channel configurations used by manufacturers in an electronic channel: direct selling, agent selling, and dual-format selling. Under direct selling, a manufacturer sells products directly to consumers through its own official website or direct selling channel (Dong et al., 2018, Wang et al., 2018). Under agent selling, a manufacturer sells products to consumers through a third-party platform such as JD.com or Amazon.cn. Under this arrangement, the platform charges the manufacturer a per-unit transaction fee for each sale and offers services to consumers (Abhishek et al., 2015, Zhang and Zhang, 2020). In dual-format selling, a manufacturer adopts a hybrid configuration mode with both direct selling and agent selling. That is, for some products the manufacturer adopts direct selling and for others he adopts agent selling. In practice, all three channel configurations can be observed. For instance, many traditional manufacturers adopt dual-format selling in their electronic channels, not only setting up direct channels such as manufacturer outlets or their own online stores (Tsay and Agrawal, 2004, Arya et al., 2007, Yang et al., 2018) but also establishing web shops on a direct-to-consumer platform (e.g. http://q.taobao.com). Such examples include IBM, HP, Apple, Sony and Samsung (Huang et al., 2018, Yang et al., 2018, Zhang et al., 2019, Zhang et al., 2019). Moreover, Haier, the largest home appliance manufacturer in China, not only sells products through its own Haier Mall, but also serves as a major supplier to Suning.com and Gome.com.cn (Shen, Willems, & Dai, 2019).¹ However, other companies adopt agent selling in their electronic channels, such as Supor and Pioneer Electronics. To be specific, Supor sells products in the electronic channel through official, authorized online stores, such as JD.com, Tmall.com or Amazon.cn, rather than through its own official website.² Pioneer Electronics sells its multimedia digital products through Tmall.com in the electronic channel.³ Furthermore, some companies adopt direct selling, for example, Dell, which popularized the direct selling format.

The different configuration forms of an electronic channel have stimulated interest in studying how a manufacturer configures an electronic channel (Ow and Wood, 2011, Abhishek et al., 2015, Wang et al., 2018, Chen et al., 2019). It is necessary for a manufacturer to weigh the costs and benefits. There are many benefits for a manufacturer to establish an electronic channel, such as intensifying pricing flexibility and distribution control (Huang et al., 2018), reducing operating costs relative to the traditional channel (Alba et al., 1997), and accessing more consumers (Forman, Ghose, & Goldfarb, 2009). However, setting up an electronic channel can generate extra costs, and retaining multiple channels may result in channel conflict (Tsay & Agrawal, 2004). Additionally, in order to obtain a manufacturer's optimal channel configuration strategy, it is necessary to understand the factors that affect channel configuration strategies. In this paper, we consider three significant factors: channel competition, platform service, and the cross-channel effect, which are characterized in the following paragraph.

First, when there are multiple channels to sell products, channel competition intensity is the key factor that affects the manufacturer’s channel configuration (Abhishek et al., 2015). Second, most platforms (e.g., Tmall.com, Gome.com.cn, Vipshop.com, JD.com) not only provide an electronic marketplace for manufacturers but also start to offer services for consumers, such as information service, advertising marketing service, sales service, etc. (Shen et al., 2019, Zhang and Zhang, 2020). Because platform service has a significant impact on customers’ channel choice and market demand, it may influence the manufacturer’s profit and the whole supply chain performance, thus affecting the manufacturer’s optimal channel configuration strategy. Third, sales in one channel may affect that in another, thus, the addition of an electronic channel inevitably has an effect on the sales of the traditional channel, which is called the cross-channel effect (Abhishek et al., 2015, Nie et al., 2019). Existing research suggests that the cross-channel effect is negative in the apparel industry (Brynjolfsson, Hu, & Rahman, 2009) but positive in the media industry (Mortimer et al., 2012, Smith and Telang, 2010). Moreover, Yan, Zhao, and Liu (2018) suggest that electronic and traditional channels can complement each other in the book retail industry. The diversity of the cross-channel effect may affect the optimal channel configuration strategy.

We put forward three electronic channel structures for a supply chain that already has a traditional channel: a single channel with direct selling, a single channel with agent selling, and a dual-channel with dual-format selling, referred to as channel structure D, P, and DP, respectively. In addition, we consider the above key factors such as channel competition, cross-channel effect and platform service simultaneously. The main purpose of this paper is to investigate how the manufacturer makes an effective channel configuration strategy. Specifically, we seek to answer the following research questions: (i) Under three different channel structures, what are the optimal pricing decisions of the manufacturer and per-unit transaction fee decision of the platform? (ii) From both the perspective of the manufacturer and of the whole supply chain, which channel structure should the manufacturer choose? (iii) How do electronic channel competition, cross-channel effect, and service impact factor affect equilibrium outcomes and the optimal channel configuration strategy?

We use linear demand functions related to selling price and platform service, and build three-stage sequential game models to analyze the impact of channel structure on pricing, market demand and profits. Sensitivity analysis is performed and numerical examples are given to reveal the impact of exogenous parameters on equilibrium outcomes and channel configuration strategy theoretically and numerically. We find that increases in basic market demand, transaction fee impact factor and cross-channel effect will all increase the transaction fee of the platform, thus improving the platform service level. By comparing supply chain members’ profits, we obtain the optimal channel configuration strategy from the perspective of the manufacturer and the whole supply chain, respectively. Results show that the manufacturer never chooses channel structure D. Moreover, channel competition intensity and transaction fee impact factor are identified as critical factors affecting channel configuration. Specifically, when these two factors are both either large or small, DP is the optimal configuration, otherwise, P is chosen. For the cases of positive entry cost and endogenous pricing in the traditional channel, we find that the equilibrium outcomes are affected while our main results still hold. In addition, our research can provide reference and guidance to readers and supply chain managers. In summary, we list the following points to highlight the main innovations and results of this study:

• Electronic channels for direct, agent, or dual-format selling are configured.

• Channel competition, platform service and cross-channel effect are simultaneously considered.

• Competition intensity and transaction fee impact factor are vital in channel choice.

• An electronic channel consisting solely of direct selling will never be selected.

• Our results are robust for cases of positive entry cost and endogenous pricing in the traditional channel.

The remainder of this paper is structured as follows. The related literature is reviewed in Section 2 and a model framework containing channel structure, demand specification, cost structure and game sequence is put forward in Section 3. In Section 4, the equilibrium outcomes are derived by developing and addressing game theoretic models. In Section 5, the equilibrium outcomes in different channel structures are compared to obtain the optimal channel configuration. Furthermore, sensitivity analysis and numerical examples are conducted to reveal the effects of exogenous parameters on equilibrium outcomes and channel configuration. Section 6 discusses three extensions to incorporate positive entry cost, endogenous pricing, and demand-driven data value. Section 7 summarizes management insights for researchers and managers. Conclusions and future research are presented in the last section.