Competitive distribution channel strategy of firms under duopoly

This paper studies strategic distribution channel decisions incorporating Internet sales for two competitive firms. Firms specifically have three alternative strategies; the pure online strategy, the traditional channel strategy (so called "bricks-and-mortar") and the "hybrid" channel strategy (so called "clicks-and-mortar"). Consumers are assumed to be heterogeneous with regard to their location, while they must incur some "interaction costs" {i.e., the out-of-pocket costs/benefits of interacting indirectly with the firms when they purchase online). Therefore, the relation between the distribution of consumers' location and the convenience of an online channel plays an important role in determining the firms' channel strategies. Based on this motivation, we analyze the equilibrium channel strategies in the presence of the ex-post competition on prices by using a game theoretic approach and explore how firms' locations and interaction costs influence the equilibrium outcome. We show that if firms' products are sufficiently differentiated from each other, the equilibrium channel strategy is determined independently of the rival's location and interaction cost, but there is an impact on equilibrium profit. This result is in a sharp contrast to the well-known necessity of differentiation to relax intense price competition. Furthermore, a sensitive analysis based on some numerical experiments suggests that unless a firm has a very attractive online channel compared to its rival's, the advantage/ disadvantage of its location rather than interaction cost is likely to contribute to creating its competitive advantage/disadvantage.