Channel competition and selection in a capacitated multi-channel distribution system

In this paper, we consider a two-stage supply chain involving a manufacturer of limited capacity and an independent retailer. The manufacturer can distribute her product to the end customers through the independent retailer as well as her wholly-owned direct channel. We assume that the manufacturer has the authority to select her distribution channel before the selling season. Using a three-stage dynamic game model, we develop the optimal decision of channel selection for the manufacturer. We find that when the capacity is very tight, the direct channel does take priority and the retailer will be excluded; when the capacity is moderately tight, the manufacturer will sell to the retailer if the retailer's optimal order quantity is small enough; when the capacity is very ample, the channel selection decision depends upon the prices and the retailer's order. We also show that there can be situations in which the manufacturer will deny the retailer's order even when the capacity is not entirely utilised. Many other interesting managerial insights are provided and illustrated with numerical examples.