Retail Channel Structure Impact on Strategic Engineering Product Design

We examine, in a strategic setting, the broad issue of how retail channel structures–retail monopoly versus retail duopoly–impact a manufacturer's optimal new product design, both in terms of engineering design specifications as well as manufacturer and retailer profits. Our strategic framework enables manufacturers in specific contexts to anticipate the reactions of the retailers and competitive manufacturers to new designs in terms of the retail and wholesale pricing and to understand how different channel structures and channel strategies (such as an exclusive channel strategy) impact the engineering design of the new product, conditional on consumer preference distributions and competitor product attributes. Based on a simple numerical and a power tool design example, we illustrate how the insight from the framework translates to design guidelines; specifically, understanding which designs are optimal under differing channel structure conditions, and which design variables need precise targeting given their profit sensitivity.