Manufacturer’s direct distribution with incumbent retailer’s product line choice

This study explores how an incumbent retailer chooses its product line when challenged by its manufacturer’s direct channel. A bilateral monopoly supply chain with two horizontally differentiated product varieties is considered. The retailer decides either or both varieties to procure from the manufacturer. After receiving the retailer’s order, the manufacturer chooses whether to establish its direct channel, and if so, chooses either or both varieties to sell directly to consumers. My findings show that when facing the manufacturer’s direct channel, the retailer may strategically abandon one variety under certain circumstances. The emergence of a direct channel always reduces the retailer’s profit and may even reduce the manufacturer’s own profit, meaning a “lose-lose” situation.