Impacts of Strategic Consumers and Direct Channel on Supply Chain Contracting

Abstract

We examine the impacts of strategic consumers and direct channel on the manufacturer’s choice between static and dynamic contracts. We consider two scenarios: One in which the manufacturer sells through a single retailer, and the other in which it sells through two different retailers sequentially. In each scenario, the retailer(s) sets the retail prices, which the manufacturer’s direct channel matches, while consumers may time their purchases. We derive the subgame perfect Nash equilibrium. We find that in the first scenario, the static wholesale contract is preferred if the market share of the direct channel is large, as it alleviates strategic consumer waiting. This is most effective when consumers are moderately strategic. In the second scenario, intertemporal competition arises between the two retailers, which may not only reduce supply chain friction but also counteract strategic waiting. As a result, the equilibrium changes structurally. The dynamic wholesale contract is preferred when consumers are not very strategic, and the direct channel no longer plays a significant role. Several extensions of our main setting are explored. Our findings provide practical insights into how an upstream firm can effectively manage its retail channel in the presence of a direct channel and strategic consumers.