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

Baozhuang NIU, Liming LIU, Jun WANG

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

4 Citations (Scopus)

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).
Original languageEnglish
Pages (from-to)325-338
Number of pages14
JournalJournal of the Operational Research Society
Volume67
Issue number2
DOIs
Publication statusPublished - 1 Feb 2016

Fingerprint

Risk analysis
Costs
Operating costs
Sales
Integrated
Channel structure
Retailers
Industry
Financing
Termination

Keywords

  • channel structure
  • retail operating expenses
  • termination risk

Cite this

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title = "Sell through a local retailer or operate your own store? Channel structure and risk analysis",
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Sell through a local retailer or operate your own store? Channel structure and risk analysis. / NIU, Baozhuang; LIU, Liming; WANG, Jun.

In: Journal of the Operational Research Society, Vol. 67, No. 2, 01.02.2016, p. 325-338.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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AU - NIU, Baozhuang

AU - LIU, Liming

AU - WANG, Jun

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N2 - 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).

AB - 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).

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