The Channel Mode for a Supply Chain Selling Products with Network Externalities

We develop a dynamic game model of a supply chain in which the manufacturer sells products with network externalities both through direct and retail channels, and investigate the equilibrium pricing and channel selection strategy of the supply chain members. We analyze the effects of the intensity of network externality on the equilibrium outcome and channel selection strategy of the supply chain members. It reveals that, compared to the single channel mode, the manufacturer and the retailer charges a lower wholesale price and retail price under dual channel mode. With network externalities, the direct channel incurs positive demand and profit under certain conditions. The profit of the manufacturer is always positively correlated to the network externality. The manufacturer prefers dual channel mode to single channel mode, if the network externality is sufficiently large. In contrast, the retailer prefers dual channel to single channel, when the network externality is sufficiently small. Therefore, there exits Pareto range about the network externality, in which both the manufacturer and the retailer both obtains a higher profit under dual channel mode than single channel mode.