Offline retailers expanding online to compete with manufacturers: Strategies and channel power

As traditional offline retailers complain about manufacturers’ decision to compete with them by selling their products directly online, many are responding by starting their own online sales operations. This paper analytically examines when an offline retailer's expansion online is desirable and how it affects channel members’ strategies and profits in a dual channel. We found that staying out of the online market when it is still not large enough or is extremely large could be a better alternative for an offline retailer. Otherwise, a retailer's online expansion cannibalizes offline sales, but increases the retailer's overall sales. It increases the retailer's channel power at the expense of the manufacturer, who continues however to have the lion's share of the channel profit. Depending on market conditions, the retailer may or may not set the same price across channels, while the manufacturer always sets a lower price than the retailer in the online channel. Finally, a price war across channels in a relatively large online market further reduces offline prices and can drive the retailer out of the offline market.