Implications of unobservable promotion on distribution channel strategies in a retail platform

Besides distribution services, retail platforms are beginning to provide unobservable promotion services to enhance traffic and demand. Thus, suppliers are incentive to consider the impact of platform promotion on distribution channel strategies. Hence, considering a retail platform supply chain in which the supplier uses an outcome-based contract to incentivize the retail platform’s hidden promotion effort, this paper investigates the implications of unobservable platform promotion on the supplier’s distribution channel strategies. We develop a Stackelberg game model to examine the equilibrium outcomes of reselling and agency selling under unobservable promotion action and find that the retail platform may volunteer to promote in both channels when the market potential difference is large. Interestingly, voluntary promotion may motivate the supplier to increase the wholesale price. Furthermore, we derive conditions under which the supplier prefers reselling and agency selling. When the market potential difference is small, the distribution channel strategy is a threshold policy of the commission rate, below which agency selling is preferred, and reselling is preferred otherwise. It is counterintuitive that when the market potential difference is large, the commission rate will not influence the preference of channel selection and the reselling channel is always preferred by the supplier. Interestingly, the impact of platform promotion on the threshold of distribution channel strategies is non-monotonic in the increment probability of high market potential and market potential difference. Specifically, platform promotion induces the upstream supplier to select the reselling channel suppose the increment probability of high market potential is moderate, while induces the supplier to select the agency selling (reselling) channel when the market potential difference is moderate (large) suppose the increment probability of high market potential is high. Moreover, we find that enhancing the increment probability of high market potential benefits the supplier more, but only moderate increment probability of high market potential makes the retail platform better off.