Internet channel entry: A strategic analysis of mixed channel structures

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Author Information : Eunkyu Lee (Whitman School of Management, Syracuse University)
Weon Sang Yoo (Korea University Business School)

Year of Publication : Institute for Operations Research and the Management Sciences (2011)

Summary of Findings : The researchers develop and analyze a game theoretic model of online-offline mixed channel structures to demonstrate that the impact of the Internet channel introduction substantially varies across channel structures and market environments depending on the balance among five key strategic forces, sometimes leading to outcomes contrary to the common belief that adding an Internet channel leads to a greater firm profit and lower retail prices and enhanced consumer welfare in the marketplace.

Research Questions : 1. When the Internet channel is added to an existing channel system, how does it affect each channel member’s performance and consumer welfare? How is this effect moderated by the specific channel structure before and after the Internet channel launch?

2. What are the key underlying forces that shape the impact of the Internet channel introduction?

3. How do varying market conditions affect the impact of the Internet channel introduction?


What we know : Despite the rapid growth and exciting potential of emerging marketing channels such as the Internet, finding the best way to utilize them in conjunction with the conventional bricks-and-mortar store channel continues to be a challenge for many firms. This study extends the limitations of previous studies with a primary focus on manufacturers’ direct online channels, and provides a deeper and broader understanding of the impact of the introduction of an Internet channel in a variety of mixed channel structures.

Novel Findings : The researchers’ game-theoretic model captures the fundamental difference between two different channel types and consumer heterogeneity in preference for the Internet channel use. The equilibrium solutions indicate that Internet channel entry does not always lead to lower retail prices and enhanced consumer welfare.

An independent retailer might become worse off after adding its own Internet outlet under certain market conditions.

The impact of the Internet channel introduction substantially varies across channel structures and market environments, and can be explained by the interplay of five key strategic forces.

Novel Methodology : This study proposes a two-dimensional spatial model to capture the fundamental difference between an offline distribution channel that exists at a location in the physical space and an online channel that is not spatially positioned. This allows the researchers to clearly distinguish the difference between the impact of adding another physical store to the channel system and that of a new Internet entry.

Implications for Practice : For marketing managers, this study highlights the key moderating role of channel structure and market environment on the impact of an Internet channel entry. Because the impact can vary substantially depending on whether it is introduced by the manufacturer, the existing retailer, or a new independent e-tailer, the key strategic question is not only whether to introduce an Internet channel but also how.

Retailers facing new competition from an Internet channel will have to strategically decide whether to try to maintain market share, settle for an even split of the market, or substantially narrow target market scope to remain profitable.

Implications for Society: The growth of the Internet channel does not always lead to lower prices and enhanced consumer welfare.

Implications on Research: Extends Balasubramanian’s model [Balasubramanian, S. 1998. Mail versus mall: A strategic analysis of competition between direct marketers and conventional retailers. Marketing Sci. 17(3) 181–195] to develop a new two-dimensional model that explicitly captures the difference between the online and offline channels.

Full Citations : Weon Sang Yoo, Eunkyu Lee, (2011) Internet Channel Entry: A Strategic Analysis of Mixed Channel Structures. Marketing Science 30(1):29-41. http://dx.doi.org/10.1287/mksc.1100.0586

Abstract : By analyzing various alternative mixed channel structures composed of a monopoly manufacturer and online and offline outlets, we investigate how the specific channel structure and varying market conditions moderate the impact of Internet channel entry on the channel members and consumers. As an extension of Balasubramanian's model [Balasubramanian, S. 1998. Mail versus mall: A strategic analysis of competition between direct marketers and conventional retailers. Marketing Sci. 17(3) 181–195], our game-theoretic model captures the fundamental difference between two different channel types and consumer heterogeneity in preference for the Internet channel use. The equilibrium solutions indicate that Internet channel entry does not always lead to lower retail prices and enhanced consumer welfare. We also find that an independent retailer might become worse off after adding its own Internet outlet under certain market conditions. We find that the impact of the Internet channel introduction substantially varies across channel structures and market environments. We explain these varied results by proposing a framework of five key strategic forces that shape the overall impact of the Internet channel introduction.

The researchers develop and analyze a game theoretic model of online-offline mixed channel structures to demonstrate that the impact of the Internet channel introduction substantially varies across channel structures and market environments depending on the balance among five key strategic forces, sometimes leading to outcomes contrary to the common belief that adding an Internet channel leads to a greater firm profit and lower retail prices and enhanced consumer welfare in the marketplace.

Eunkyu Lee

Eunkyu Lee

Professor Lee is a professor of marketing. His primary research interests include marketing channel strategy, product category management and consumer survey methodology.
Eunkyu Lee
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