Internet Channel Entry: A Strategic Analysis of Mixed Channel Structures

Abstract

By analyzing various alternative mixed channel structures composed of a monopoly manufacturer and online and offline outlets, we investigate how the specific channel structure and varying market conditions moderate the impact of Internet channel entry on the channel members and consumers. As an extension of Balasubramanian's model [Balasubramanian, S. 1998. Mail versus mall: A strategic analysis of competition between direct marketers and conventional retailers. Marketing Sci. 17(3) 181-195], our game-theoretic model captures the fundamental difference between two different channel types and consumer heterogeneity in preference for the Internet channel use. The equilibrium solutions indicate that Internet channel entry does not always lead to lower retail prices and enhanced consumer welfare. We also find that an independent retailer might become worse off after adding its own Internet outlet under certain market conditions. We find that the impact of the Internet channel introduction substantially varies across channel structures and market environments. We explain these varied results by proposing a framework of five key strategic forces that shape the overall impact of the Internet channel introduction.