Channel structure selection in a competitive supply chain under consideration of marketing effort strategy

Abstract We study the optimal decisions of a supplier in terms of channel structure selection and marketing effort strategy when facing a competitor offering substitutable products. By employing game theoretic models for different retail competition scenarios, we show that equilibrium channel structures are primarily determined by the intensity of retail competition along with the marketing effort level. Channel structure selection and marketing effort strategy are interdependent and interactive. Our results show that the supplier has an incentive to make marketing effort and sell products directly to consumers in most cases. When the retail competition becomes fiercer, the supplier can benefit from selecting a distribution strategy based on customers' sensitivity to the supplier's marketing effort. In contrast, the supplier selling products through the downstream retailer will not make marketing effort under certain market conditions (e.g., low competition and high customer sensitivity to the supplier's effort performance), while the competitor adopts the direct-sales strategy. Generally, the supplier will prefer making marketing effort relative to undertaking product distribution. Finally, we also examine the strategic effects of channel structure selection and marketing effort decisions on the competitor's profit in the retail competition market.