Channel Conflict and Coordination in the E-Commerce Age Andy A. Tsay • Narendra Agrawal Leavey School of Business, Santa Clara University, Santa Clara, California 95053-0382, USA atsay@stanfordalumni.org • nagrawal@scu.edu A number of factors, including developments in Internet-based commerce and third-party logistics, have led many companies to consider engaging in direct sales. Such a company may at once be both a supplier to and a direct competitor of any existing reseller partners (e.g., land-based retailers), which can result in “channel conflict.” This can have momentous implications for distribution strategy. To generate managerial insights into this important issue, we develop a model that captures key attributes of such a setting, including various sources of inefficiency. We examine these in detail and identify a number of counterintuitive structural properties. For instance, the addition of a direct channel alongside a reseller channel is not necessarily detrimental to the reseller, given the associated adjustment in the manufacturer’s pricing. In fact, both parties can benefit. Finally, we examine ways to adjust the manufacturer–reseller relationship that have been observed in industry. These include changes in wholesale pricing, paying the reseller a commission for diverting customers toward the direct channel, or conceding the demand fulfillment function entirely to the reseller. The latter two schemes could be mutually beneficial in that they achieve a division of labor according to each channel’s competitive advantage. Key words: retail sales; direct sales; catalog sales; resellers; intermediaries; electronic commerce; Internet commerce; channels of distribution; dual distribution; channel conflict; supply chain management; coordination; mathematical modeling; game theory Submissions and Acceptance: Received March 2002; revision received November 2002; accepted April 2003. 1. Introduction For any company with a product to sell, how to make that product available to the intended customers can be as crucial a strategic issue as developing the prod- uct itself. While distribution strategy is a very tradi- tional concern, for many companies it has recently come under intense scrutiny due to a number of major developments. First, the expanding role of the Internet in consumer and business procurement activity has created unprecedented opportunities for easy and vast access to customers. And second, the economics of materials delivery has been revolutionized by the ef- ficient and pervasive logistical networks deployed by third-party shipping powerhouses, such as Federal Express and United Parcel Services. As a result, many manufacturers are reconsidering whether they should rely on intermediaries (we will refer to these as “re- sellers,” so that our logic applies not only to retailers, but also various forms of distributors, wholesalers, etc.), sell directly to end customers, or even pursue both approaches in parallel. 1 The intent of this paper is to provide rigorous insight into this issue, which will necessitate proper acknowledgment of the objectives and likely reactions of the resellers. Firms in a variety of industries have recently estab- lished avenues for selling direct (e.g., Nike, Estee Lauder, Mattel, Eastman Kodak, IBM, the former Compaq, Dell Computer, Cisco Systems, etc.), and still others are seriously evaluating such strategies (cf. Stern, El-Ansary, and Coughlan 1996; Collinger 1998; Hamer and Sample 1998; Schonfeld 1998; Goldman 1 In general, this decision entails a determination of the number of levels in the distribution network, the number of outlets within each level, and other variables, such as pricing, inventory levels, service levels, etc. The traditional marketing literature refers to these as distribution strategy, distribution intensity, and distribution manage- ment, respectively (Corstjens and Doyle 1979). In this paper, we focus on the strategy and management activities. POMS PRODUCTION AND OPERATIONS MANAGEMENT Vol. 13, No. 1, Spring 2004, pp. 93–110 issn 1059-1478 | 04 | 1301 | 093$1.25 © 2004 Production and Operations Management Society 93