The impact of the manufacturer's e-business through direct internet channel on the incumbent independent physical store and the market

The purpose of this study is to investigate the impact of the Internet channel introduction on the channel composed of a monopoly manufacturer and an independent physical retailer. This study also examines what would be the best strategy for the independent physical retailer to respond to the new Internet channel entry. The game theoretic model consists of a monopolist manufacturer selling its product through a channel system including one independent physical store before the entry of an Internet store. The addition of the Internet store to this channel system results in a mixed channel comprised of two different types of channels. The new Internet store is launched by the manufacturer. The results show that an Internet channel entry has the following impacts on the existing channel members. First, the manufacturer's Internet channel introduction mitigates the double marginalization problem of the traditional channel. Second, the manufacturer could enhance its channel power by introducing its own Internet channel while it diminishes that of the incumbent independent physical retailer. Third, manufacturer's adding a new Internet store leads to a higher demand. Finally, with its own Internet direct channel, the manufacturer has an opportunity to practice price discrimination. The manufacture leaves only those with a strong preference for the physical store to be served by the independent physical store. The results suggest that the independent physical store's best strategy to the entry of the manufacturer's Internet channel is to focus on the consumers who are highly loyal to the physical store while maintaining a high retail price.