With the rapid development of e-commerce, many manufacturers nowadays opt to open an online channel to engage in direct online sales. The mix of retailing with an online channel adds a new dimension of competition and complementarity to a product's distribution channels. Our model focuses on the strategic effect of the manufacturer's national advertising on alleviating the channel competition. We use a game-theoretical model to show that opening an online channel with the added national advertising effectively alleviates the channel conflict and thus helps improve the whole channel and each channel member performance. Depending on the different product categories and the degree of channel substitutability, the manufacturer's investment in the national advertising also will be different. The value of national advertising increases as product is more compatible with online sales and channel substitutability increases.
According to Commerce Department estimates (www.electran.org), US e-commerce sales totaled $194.3 billion in 2011, up 16.1% from $167.3 billion in 2010. By 2015, online sales are expected to reach around $270 billion, an increase of $100 billion compared to 2010 (www.emarketer.com). The rapid development of commerce on the Internet has made it attractive for many manufacturers who traditionally distribute their products through retailers, to engage in direct online sales. There are many reasons for this. First, the expanding role of the Internet in consumer and business procurement activity has created unprecedented opportunities for easy and vast access to customers and for firms. Secondly, the economics of materials delivery have been revolutionized by third-party shipping such as Federal Express and UPS. As a result, many manufacturers such as Hewlett & Packard, Lenovo, Dell Computer, Compaq, Sony, Panasonic, Mattel, Pioneer Electronics, Cisco System, P&G, and Estee Lauder, in a variety of industries, have begun to use online channel to sell their products directly to consumers (1, Seifert et al., 2006, Chen et al., 2008 and Amrouche and Yan, 2012). At a time when more and more manufacturers are engaging in direct online sales, their retail partners are concerned that the orders placed through a manufacturer's online channel might reduce their own sales. This concern gives rise to a “channel conflict”.
In general, channel conflict can undermine attempts to develop cooperative relations in the intermediated channel, which may have an effect of lowering the profits of all parties. Manufacturers are reacting in different ways to avoid this channel conflict. Some manufacturers (e.g., Levi Strauss & Co.) have halted direct sales (Collett, 1999), while others have tried to convince retailers that their direct online channel taps customer segments that would otherwise not buy the product. For example, Herman Miller Inc., Zeeland, Mich., which manufactures office furniture, is careful to explain to its dealers that its online offers are targeting the home office market, a segment that its dealer network did not serve (Keenan, 1999). More often, direct online channel is used only to provide information and support sales in traditional channel.
Does opening an online channel with the added national advertising pose a serious threat to the retailer? Our model gives a novel modeling answer to this question. Our model studies the strategic effect of the added national advertising on the performances of both the manufacturer and the retailer. We use a game-theoretical model to show that opening an online channel with the added national advertising effectively alleviates the channel conflict and thus helps improve the whole channel and each channel member performance. Consequently, both the manufacturer and the retailers will value this advertising investment and receive more handsome returns. Considering different product compatibility to the web and channel substitutability, the manufacturer's investment in the added national advertising also will be different. When product is more compatible with online channel or channel substitutability increases and thus channel competition becomes more intense, the added national advertising becomes much more valuable to both the manufacturer and the retailer.
Our analysis might have some limitations. In this paper, only price is considered in the demand functions. Further research can continue to investigate whether the qualitative implications derived in our paper can be generalized to empirical models that fully incorporate all the variables that go into a purchasing decision. Furthermore, in the future, aside from considering other factors, we can extend our study to examine if other mechanisms (e.g., revenue sharing, cooperative advertising, etc.) can be utilized to achieve channel coordination.
