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). {71201175, 2013WYXM0001}
Publisher Statement
Copyright © 2016 Operational Research Society Ltd. Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
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