Traditional and Internet channels

Huang, W. and J.M. Swaminathan, Pricing On Traditional And Internet Channels Under Monopoly And Duopoly Analysis And Bounds, Working Paper, Kenan-Flagler Business School, UNC Chapel Hill, 2003. 

A fully integrated structure, with a manufacturer controlling both a traditional and internet channel, provides opportunity for further research in this area. 

Optimal inventory base stock levels in the traditional and internet channels for a dedicated supply chain are ((p + tt — ct)/(p + tt + /it — otCT))... 

Huang, W. and J. M. Swaminathan. 2003. Pricing on traditional and internet channels under monopoly and duopoly Analysis and bounds. Working Paper. The Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC. 

Individual customers are modeled using a utility function for the product sold by the firm. A customer s utility for the product is decreasing in the price of the product and the effort to purchase the product. They assume that the scaled effort required to purchase a product is distributed uniformly between 0 and OLT for the traditional channel (representing factors such as distance from the store), and between 0 and otj for the internet channel (representing factors such as internet connection speed and comfort with making purchases on the Internet). The traditional and internet efforts of a customer are assumed to be independent. A linear customer utility function common in the marketing literature is used the utility a customer j receives from a product in channel x is... 

The Internet has provided traditional manufacturers and retailers a new avenue to conduct their business. On one hand, utilizing the Internet channel potentially could increase the market for the firm and, due to synergies involved, reduce the costs of operations. On the other hand, a new channel threatens existing channel relationships through possible cannibalization. This chapter explores recent research on coordination opportunities that arise for firms that participate in both traditional channels as well as internet channels. Three areas of coordination are discussed procurement, pricing, and the backend operations of distribution and fulfillment. 

For a manufacturer that has forward integrated to provide direct product sales (models 3 and 4 of Figure 15.1), the opportunity exists to coordinate distribution and fulfillment. Research taking a traditional approach to channel coordination (which seeks to eliminate double marginalization) is thoroughly reviewed in Lariviere (1999) and Tsay, et al. (1999). In this chapter, we focus attention on research that assumes the existence of both a traditional channel and an internet channel, and exploits the differences between the two channels to manage the supply chain more effectively. 

Under the set of assumptions used in this model, the introduction of an internet channel leads to a higher price than was charged with only the traditional channel. For some parameter values, the internet channel causes customers to abandon searching in favor of ordering the familiar product over the web, thus the Internet can lead to higher prices and a reduction in search activity. They... 

Cattani, et al. (2003) use a consumer choice model to determine the optimal prices that a firm should charge when they compete in both a traditional channel and an internet channel. They allow the firm to set different prices in each channel and analyze the effect of different factors on the relative prices in the two channels. Their results provide some guidance to firms attempting to establish an effective management structure for multi-channel competition. 

A second strategy would be to allow prices in both the traditional channel and the internet channel to differ from the original price. When prices in both channels are matched (but not necessarily the same as the original price in the traditional channel), as many firms do in practice, the resulting price will be higher than the original price when the two channels costs are the same. When different prices are allowed in each channel, the relationship between the prices in each channel is dependent upon the relative consumer acceptance of the Internet (characterized by the relationship between ar and aj in the model). Under the assumption that costs are the same in each channel, the internet price is higher than the price in the traditional channel when a/ > ar (i.e., the Internet is considered less convenient than the traditional channel), and the... 

The rationale for the model is that retail customers demand instantaneous availability and the retailer will experience lost sales if the product is not in stock. In contrast, internet customers are willing to wait. In particular, the short delay incurred by transshipping leftover product from a retailer to the customer does not result in lost sales in the internet channel, although the longer delay required to source the product from the manufacturer does result in lost sales in the internet channel (as it does in the traditional channel). 

In Level 5, the idea of virtual logistics is part of the collaboration that takes place as the network members want to find the best costs and satisfaction, whether the orders go through traditional channels or are processed through an Internet channel. With residential package delivery, for example, expected to top 2.1 billion per year by 2003, this latter situation is of great interest to business to consumer (B2C) channel providers. Here lead logistics providers (lip) can enter the equation — firms with little to no physical assets, but the wherewithal to find the best answer to logistics needs, inbound and outbound. 

The increased use of the Internet in recent years as a means of communicating information on drugs and medical devices has provided considerable benefits to the healthcare industry. The Internet offers many possibilities in terms of graphic representation of data and the ability to publish information to a wider audience at a faster speed than by the use of traditional marketing channels. The overriding compliance consideration, however, is the accurate transmission of information to the reader, whether the reader is a member of the public or a pharmaceutical or healthcare professional. 

The business use of the Internet and electronic commerce enables online firms to reap the benefits of EDI at lower cost. The ultimate fast-response distribution system is instantaneous online delivery, a goal that a few e-businesses in select industries have already achieved. By their very nature, on-demand Internet audio and video services have no delay in reaching customers. In these examples, the efficiency stems from highly automated and integrated distribution mechanisms rather than from the elimination of distribution channels as in more traditional industries. 

The Internet along with Y2K was the perfect accelerant. The two forces intertwined to reshape and transform both business-to-consumer and business-to-business relationships. The most profound effect was in retail. As shown in Table 1.1, the Internet sparked a new channel that outpaced the growth in traditional store formats. While the uninformed might conclude that the growth of e-commerce made bricks obsolete, in reality, the opposite was true. Successful companies transformed their traditional supply chains to meet the new requirements of this growth channel. It required new bricks, new processes, and a business transformation. 

The research community has responded to the E-Business challenge. Despite the infamous dot-com bust in the early 2000 s, scores of research initiatives, workshops, technical papers, and special journal issues have been devoted to the subject. E-Business remains a critical subject not only in the research community, but also in corporate boardrooms. Instead of the revolution that would replace every facet of business, the rise of E-Business might be viewed as the emergence of new economic intermediaries that offer opportunities for innovation. These new intermediaries offer different means to respond to market demands (e.g., Internet vs. traditional channels), to facilitate sourcing, procurement, and price discovery (e.g., electronic auctions), and to develop new mechanisms for coordination and execution (e.g., dynamic pricing, revenue management, and collaborative forecasting). 

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