Strategic Implications of Hybrid Channel Distribution in a Competitive Market

The Internet is growing in significance in B2C electronic commerce as people become more comfortable with the technology. Past analytical research on Internet commerce has mainly focused on its ability to lower consumers’ search costs. Few have looked at the implications of having the Internet as an additional channel of distribution on firms. In this paper, I adopt a game theoretic approach to analyze the impact of competition on the hybrid channel distribution problem. I also look at a differentiated product market and highlight the role of product differentiation in Internet commerce. There are three major findings: (1) direct marketing through the Internet can achieve channel coordination by reducing the retailer’s markup on goods; (2) there is spillover effect such that Internet marketing implemented by a manufacturer also benefits other manufacturers in the industry; and (3) a manufacturer implementing Internet marketing may actually want to see less product differentiation in the industry.