Negative effect of price-matching policy on traditional retailers in a dual-channel supply chain with different content formats

We investigate a model in which a monopoly supplier distributes two types of its product, physical and electronic products, through a traditional/brick-and-mortar retailer with a wholesale price contract and an online retailer with an agency contract, respectively. The supplier and the online retailer negotiate the royalty rate, which is a ratio of the online retailer’s revenue to the entire revenue of the channel. We also discuss the case in which the supplier imposes the following self-regulation to balance its dual-channel supply chain: the retail price of the online retailer is not lower than the wholesale price for the traditional retailer. What will happen if the supplier employs such self-regulation? Is self-regulation beneficial to the two retailers? To answer these questions, we first derive the equilibrium without such self-regulation. Second, we investigate what happens if the supplier employs such self-regulation. We obtain the following results. First, in the baseline model, an increase in the online retailer’s bargaining power over the supplier benefits the two retailers but harms the supplier. Second, under self-regulation, the wholesale price is strictly higher than that in the baseline model. Third, the retailers’ equilibrium prices are also strictly higher than those in the baseline model. Self-regulation always benefits the online retailer. It benefits the traditional retailer if the online retailer’s bargaining power is sufficiently weak. Furthermore, self-regulation benefits the supplier if the substitutability between the two retailers is not high. However, it reduces consumer and social welfare.