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Internet-Based Distribution Channel for Product Diversion with Potential Manufacturer’s Intervention

In: Consumer-Driven Demand and Operations Management Models

Author

Listed:
  • Barchi Gillai

    (Stanford University, Graduate School of Business)

  • Hau L. Lee

    (Stanford University)

Abstract

We study a setting in which two channels of distribution are used by retailers for selling their merchandise. The first is the traditional channel of retail stores, which the retailers use early in the product lifecycle, and the second is an Internet-based channel, which is used by the retailers later on to reach new market segments for disposing of their excess inventories. In addition, we investigate the implications of the manufacturer’s decision to intervene by offering additional units for sale through the online channel. It is assumed that demand in the secondary market – the market that the retailers and manufacturer reach through the online channel of distribution – is mainly price driven and that the equilibrium unit price in this market is determined endogenously so as to equal demand and supply and clear the market. Thus, through their inventory replenishment decisions, the retailers and manufacturer can collectively influence future demand level and the equilibrium unit price in the secondary market. We assume a large number of retailers, an assumption that is appropriate for an Internet-based market. To simplify the analysis, we further assume that all retailers are identical. We derive the retailers’ optimal order quantity, the manufacturer’s optimal number of units to offer for sale in the secondary market, and the resulting secondary market equilibrium unit price. We show that when the retailers are the only ones to use the online channel, all entities along the supply chain benefit, including the retailers, manufacturer, and primary and secondary-market customers. Intervention in the secondary market will not always be in the manufacturer’s best interest, as it may reduce her total expected profits. Furthermore, the retailers as well as primary-market customers will always be worse off from the manufacturer’s intervention, while the secondary-market customers will always benefit from this move.

Suggested Citation

  • Barchi Gillai & Hau L. Lee, 2009. "Internet-Based Distribution Channel for Product Diversion with Potential Manufacturer’s Intervention," International Series in Operations Research & Management Science, in: Christopher S. Tang & Serguei Netessine (ed.), Consumer-Driven Demand and Operations Management Models, edition 1, chapter 0, pages 115-154, Springer.
    • Handle: RePEc:spr:isochp:978-0-387-98026-3_5
    DOI: 10.1007/978-0-387-98026-3_5
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