Manufacturers' incentive to establish direct‐to‐consumer channels

Abstract

AbstractIn this paper, we consider a manufacturing duopoly in which each manufacturer initially sells a homogenous product through its dedicated retailer. The main purpose of this paper is to examine whether each manufacturer will endogenously sell its product directly to consumers. Our main results are two. One is that one manufacturer chooses a direct distribution while the other does not. Conventional wisdom suggests that increased market competition is generally presumed to decrease profits. Here, “increased competition” could mean entry of new firms or softening of product differentiation. The other is that the profits of manufacturers are higher under a dual channel than under an indirect channel when the retailing costs of manufacturers are sufficiently small.