AO is an interesting game with following features. M produces a product. He can sells either through R or directly to the end market. The market price is linear in the total quantity supplied. M is less efficient in selling; he incurs additional selling cost. The selling cost can be high or low, which is M’s private information. R only knows its prior distribution . Finally, both M and R are risk-neutral profit-maximizing.
The game plays out as follows. M first observes his selling cost, and then he decides the wholesale price. Afterwards, R places the order, followed by R deciding his direct selling quantity. Finally, M produces, delivers, and sells the product through both channels.
Three forces are in play: DM in the retail channel, signaling because of IA, and the ENC competition between the two channels. Without IA, channel competition may reduce DM, i.e., competition is beneficial. However, when IA is in place, the outcome is less conclusive. In particular, if IA is on the R’s side, it actually exacerbates DM, reducing the benefit from channel competition.
AO argues that, however, when IA arises from M’s side, it works to further reduce DM, and hence a beneficial factor. As a result, the answer to whether IA is beneficial or harmful is more nuanced: it depends critically on the nature of IA, i.e., on the M or R’s side. It also depends on the relative selling costs. By spelling out these intricacies, our paper brings a step closer to the better understanding of pros and cons of IA and ENC competition in channel management.
[SUNSET, NEWPORT BEACH, JUNE, 2015]