Sell through a local retailer or operate your own store? Channel structure and risk analysis
Journal of the Operational Research Society
Palgrave Macmillan Ltd.
retail operating expenses, channel structure, termination risk
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).
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).
Copyright © 2016 Operational Research Society Ltd.
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