Competition Between Manufacturer's Online Customization Channel and Conventional Retailer

Many manufacturers engaging in direct sales online face channel competition and conflict with traditional retailers. This paper studies a two-staged supply chain composed of a manufacturer, a retailer, and consumers with different aesthetic preferences. The manufacturer distributes a standard product via the conventional retailer. In addition, it offers a spectrum of customized products directly online. Modeling the firms' decisions on offering customization, we study their dependence on consumers' acceptance level of the online channel and consumers' fix cost. We obtain the following key findings. First, with the manufacturer offering customized products online, the Pareto improvement zone, in which both the manufacturer's and retailer's profits are improved because of alleviated vertical competition and an enlarged market, exists only under certain circumstances, and it depends on consumers' acceptance level of the online channel and their fit cost. Second, the manufacturer's offering customized products online does not necessarily lead to a reduction in the retail price. Third, the manufacturer is more aggressive in engaging in direct sales in a decentralized supply chain than in an integrated one, because it is less interested in alleviating horizontal competition (i.e., the competition between the standard and the customized products) in the decentralized setting.