Direct Marketing, Indirect Profits:
A Strategic Analysis of Dual-Channel
Supply-Chain Design
Wei-yu Kevin Chiang • Dilip Chhajed • James D. Hess

Department of Information Systems, University of Maryland at Baltimore County, Baltimore, Maryland 21250
Department of Business Administration, University of Illinois at Urbana–Champaign, Champaign, Illinois 61820
Department of Business Administration, University of Illinois at Urbana–Champaign, Champaign, Illinois 61820 kevin@wchiang.net • chhajed@uiuc.edu • jhess@uiuc.edu

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he advent of e-commerce has prompted many manufacturers to redesign their traditional channel structures by engaging in direct sales. The model conceptualizes the impact of customer acceptance of a direct channel, the degree to which customers accept a direct channel as a substitute for shopping at a traditional store, on supply-chain design. The customer acceptance of a direct channel can be strong enough that an independent manufacturer would open a direct channel to compete with its own retailers. Here, direct marketing is used for strategic channel control purposes even though it is inefficient on its own and, surprisingly, it can profit the manufacturer even when no direct sales occur. Specifically, we construct a pricesetting game between a manufacturer and its independent retailer. Direct marketing, which indirectly increases the flow of profits through the retail channel, helps the manufacturer improve overall profitability by reducing the degree of inefficient price double marginalization. While operated by the manufacturer to constrain the retailer’s pricing behavior, the direct channel may not always be detrimental to the retailer because it will be accompanied by a wholesale price reduction. This combination of manufacturer pull and push can benefit the retailer in equilibrium. Finally, we show that the mere threat of