Suppliers´ Channel Choice and the Equilibrium Industry Structure

Drop-shipping has provided traditional retailers a new means with which to fulfill orders. Consequently, many traditional suppliers have offered dual-channel (traditional and drop-shipping channel) to retailers. Despite the increasing prevalence of this practice, several fundamental questions remain for suppliers: (1) Does it pay off to offer drop-shipping option to retailers? (2) Which is the equilibrium industry structure? We study these issues in an oligopoly setting and each firm makes two decisions in the following sequence: choice of channel (channel game), choice of price (pricing game). We develop the best responses of the firms in the channel game and we find that four channel structures are possible as the industry equilibrium structure depending on the specific values of the problem parameters.