The Impact of Manufacturer’s Direct Sales and Cost Information Asymmetry in a Dual-Channel Supply Chain with a Risk-Averse Retailer

Ping Chen, Bo Li, Yushan Jiang, and Pengwen Hou
International Journal of Electronic Commerce,
Volume 21, Number 1, 2016-17, pp. 47-70.


With the development of electronic commerce, more and more manufacturers choose to distribute their products not only through retail channels but also directly to customers through online channels. This phenomenon is called manufacturer encroachment. We investigate the advantages and drawbacks of manufacturer encroachment in a dual-channel supply chain with a risk-averse retailer and stochastic price-dependent demand. By assuming that the manufacturer’s production cost is private, we build a principal–agent model to explore the optimal contracts the retailer will offer and compare four cases based on the information state and distribution strategy of the manufacturer. Furthermore, we discuss the impact of the key parameters on the optimal contracts and profits using numerical experiments. We find that choosing to encroach can bring the manufacturer much greater profit than information asymmetry.

Key Words and Phrases: Dual distribution channel, information asymmetry, manufacturer encroachment, online-offline channels, optimal contracts, risk aversion.