Distribution Channel Management in an Internet Age: Equilibrium and Social Welfare

This paper considers the conditions under which a monopoly manufacturer selling through independent retailers in a spatial market will add an Internet distribution channel (an e-channel), and analyzes the effect this would have on consumer surplus and social welfare. We find that an e-channel will be added only if consumer's travel costs are high and the e-retailer's delivery costs are low. Such double-channel operation will decrease consumer surplus if in the pre-entry case the market is fully covered by brick-and-mortar retailers. If instead the market is partially covered and delivery costs are sufficiently high, it will not decrease any consumer's surplus. When delivery costs are low, social welfare will be improved by profitable double-channel operation even if consumer surplus is harmed by it. Finally, double-channel operation could be Pareto superior even if delivery costs are high. © 2011 Springer Science+Business Media, LLC.