Recent developments in the Internet have enabled manufacturers to open web-based stores and sell directly to consumers. Such a direct sales channel allows the manufacturer to access more consumers and may also enable cost savings. On the other hand, most manufacturers also continue selling through the traditional retail stores (the retail channel). By opening a direct channel, a manufacturer becomes both a supplier and a competitor to its retailers, which creates an interesting strategic interaction. If not managed correctly, this dual sales channel strategy may alienate the retailers, and cause loss of business for both the retailers and the manufacturer. Hence, the management of dual sales channels has important implications for the competitiveness of firms and the employment levels of an economy. The objective of the research we propose is to develop dual channel strategies that increase the efficiency in a manufacturer-retailer supply chain by aligning the incentives of the firms. In particular, we will determine effective contracting mechanisms between the manufacturer and the retailer by comparing the performances of several commonly-used contract types. By doing so, we will also determine how much to sell through each channel (the channel mix) given the product and market characteristics. Existing research addresses the marketing aspects of dual channel management, ignoring the operational aspects. We will contribute to the literature by integrating a consumer channel-choice model with the operational aspects of the relation between the manufacturer and the retailer (such as the effects of inventory, product availability, and delivery lead times). In addition, we will conduct controlled experiments with human subjects to investigate whether our channel policy recommendations are consistent with decision-makers' behavior; that is, whether the recommendations can be implemented in practice.
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