Strategic contract selection of an online retailer when implementing store branding

Abstract

AbstractThis article investigates the impact of demand uncertainty on online retailers' store branding partnerships with manufacturers. The study examines whether such partnerships, involving service effort to boost demand, are effective under uncertain conditions. The supply chain comprises an intermediary and a manufacturer, with the manufacturer facing a service cost disadvantage. The benchmark case is the manufacturer's sale through the agency (AG) contract with the intermediary. Using a two‐period game‐theoretic model, the study analyzes equilibrium prices, service efforts, and profits for the AG contract and two store branding contracts: original design manufacturer (ODM) and acquisition (AC). Findings show that the intermediary adopts store branding when its service cost advantage is significant. The intermediary exhibits a preference for the ODM contract when the commission fee falls within a moderate range. Conversely, when it deviates from this middle ground, the AC contract becomes more favorable. Within the AC contract framework, with low commission fees, specifically when the service cost advantage is not particularly pronounced and demand variability is high, the intermediary opts to trigger the acquisition option exclusively when the actual demand turns out to be substantial. With high commission fees, the intermediary avoids the acquisition option. These outcomes arise from balancing the double marginalization effect caused by factors like service cost advantage, service decentralization, and wholesale price. Implementing store branding through ODM or AC contracts enhances supply chain profit when it is optimal for the intermediary. We provide insights into online retailers' decision‐making regarding store branding partnerships with manufacturers under demand uncertainty. It highlights the importance of considering factors like service cost advantage, service decentralization, and wholesale prices to determine the optimal store branding strategy. The research contributes to understanding supply chain dynamics and suggests ways to enhance supply chain profit in online retail.