Academic journal article Journal of Management Information and Decision Sciences

Cross-Sale in Dual-Channel Decentralized Distribution System

Academic journal article Journal of Management Information and Decision Sciences

Cross-Sale in Dual-Channel Decentralized Distribution System

Article excerpt

INTRODUCTION

Manufacturers may sell their products exclusively through a single retailer and certainly may also "cross-sell" their products via other retail channels. Businesses define cross-sale in many different ways. In supply chain system, cross-sale is usually defined as selling products through different distribution channels and is commonly observed in practice.

In this article, we study two manufacturers, each producing a single substituting product, sell the products through their own retailers and may also use each other's retail channel at their choice. Distribution channels are also substitutable. Depending upon the manufacturers' decisions, three different channel structures may rise: exclusive system (where both manufacturers sell their products exclusively through their own retailers), partially cross-sale system (where one manufacturer sells through both retailers and the other sells only through its own retailer), and complete cross-sale system (where both manufacturers sell products in both retail channels). We use price competition and game theoretic approach to model above framework. This paper is intended to answer the following questions: Is it always beneficial to have cross-sale in terms of charging higher prices and obtaining more profit? How do product substitutability and channel substitutability affect cross-sale decision?

The remaining of the paper is organized as following: Section 2 reviews related literature. Section 3 describes the game theoretic model. Section 4 summarizes the results and analyses. Conclusion and future work are presented in Section 5.

LITERATURE REVIEW

One stream of literature is about supply chain system (in)efficiency, channel conflict, and mechanism to achieve coordination. A comprehensive review of this stream is provided by Cachon (2003). This stream typically considers a single manufacturer selling identical products through different channels, for example, exclusive retailer, internet, or a hybrid channel. Ahn et al. (2002) study the competition between decentralized retailers and manufacturer's centralized distribution channel under price competition. Chiang (2003) finds that a single manufacturer may sell the product through direct channel to alleviate the double marginalization observed in the decentralized retail channel. Tsay and Agarwal (2004) review the modeling of channel conflict and coordination. We focus on cross-sale between channels and consider two manufacturers which sell substitutable products through decentralized distribution channels.

The two-manufacturer-two-distribution channel system has been studied by marketing and operations literature from different perspectives. Two distribution channels can be either centralized (owned by the manufacturers) or decentralized (owned by independent retailers). McGuire and Staelin (1983) study the impact of product substitutability on Nash equilibrium channel configurations and they further extend their research by incorporating quantity discount and various cost structures into their model (1986). Cachon et al. (2008) and Chiou (2009) address the effect of large product variety on consumers and retailer. Also many researchers are interested in how vertical competition strategies affect channel performance under various pricing strategies in a decentralized supply chain system, like Moorthy (1987, 1988), Gupta and Loulou (1998), and Lee and Staelin (1997). Cross-sale does not occur in any of these papers.

Within the framework of exogenous channel configurations and multiple retailers, Choi (1996) studies price competition under product and retailer differentiations for different decentralized channel configurations. Moner-Colonques el al. (2004) find retailer differentiation drives cross-sale under price competition in a decentralized channel system. But there will be no cross-sale if retail store differentiation is not observed in the above two articles. …

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