Manufacturer´s direct selling and pricing strategy

Development of e-business and logistics stimulates manufacturers to sell their products directly to customers online besides traditional channels through independent retailers. This paper studies the manufacturer´s direct selling decision under an entry game framework which conceptualizes price competition between the manufacturer and its independent retailers. The direct channel helps the manufacturer to absorb consumer segment otherwise would not purchase from the retail channel. Equilibrium results show that the direct channel is more profitable for the manufacturer when the manufacturer´s profit margin is relatively high compared to consumers´ transaction cost of purchasing, direct channel´s inefficiency is not significant, and the cost of direct channel investment is low. Our results also argue that equal-pricing policy suggested by many previous studies might be effective to avoid channel conflict in certain situations, but the effect depends on the condition of market profitability and consumer´s transaction cost. Moreover, the direct channel might not necessarily be detrimental to the retailers because they can benefit from direct channel´s inefficiency and free riding the manufacturer´s channel investment. In total, direct selling can be socially efficient.