The Analysis of Supply Chain Channel Choice on the Internet

There are many excellent features about drop-shipping. The focus of this paper is however on analyzing how drop-shipping will affect the supply chain members´ payoffs, and hence their incentive to adopt drop-shipping. So, we are interested in finding answers to the following questions: How will supply chain members´ payoffs be affected when moving from traditional channel to drop-shipping channel? Will anyone be worse or better off, or can everyone be better off? Under what conditions will they be worse or better off? We find the cases under which retailer and vendor both agree to adopt drop-shipping channel. Although drop-shipping requires transfer of demand uncertainty risk from retailer to vendor, changing the supply chain system from the traditional one to drop-shipping does not necessarily lead to a higher expected payoff for retailer and a lower one for vendor.