Title

Sell through a local retailer or operate your own store? Channel structure and risk analysis

Document Type

Journal article

Source Publication

Journal of the Operational Research Society

Publication Date

2-2016

Volume

67

Issue

2

First Page

325

Last Page

338

Publisher

Palgrave Macmillan Ltd.

Keywords

retail operating expenses, channel structure, termination risk

Abstract

Either a company store or a local retailer can be used to establish a sales channel. For high-value products with an existing competing brand, this choice represents a crucial decision a brand-named manufacturer must make for a new market. Under the burden of high operating costs, a weak local retailer may find it difficult to sustain and using it may hurt the manufacturer’s chance to successfully establish the channel. We consider a chain-to-chain competition model comprising two manufacturers and two retailers, in which one retailer may be unable to continue its operation because of high financing costs. We identify a threshold policy for the manufacturers to select the channel structure. Interestingly, we find that channel integration is not always better. Without the consideration of contract termination risk, the manufacturer will bear the operating expenses when its opportunity cost is low or the retailer’s financing cost is sufficiently high. In equilibrium, the manufacturers will choose either (decentralized, decentralized) or (integrated, integrated) channel structure. However, when the termination risk is considered, the equilibrium channel structure would be more likely (integrated, integrated) or (integrated, decentralized).

DOI

10.1057/jors.2015.39

Print ISSN

01605682

E-ISSN

14769360

Funding Information

This research was partially supported by the National Natural Science Foundation of China (No. 71201175) and Guangdong Educational Bureau Humanity & Social Science Fund (No. 2013WYXM0001).

Publisher Statement

Copyright © 2016 Operational Research Society Ltd.

Full-text Version

Publisher’s Version

Recommended Citation

Niu, B., Liu, L., & Wang, J. (2016). Sell through a local retailer or operate your own store? Channel structure and risk analysis. Journal of the Operational Research Society, 67(2), 325-338. doi: 10.1057/jors.2015.39