A Manufacturer's Incentive to Open Its Direct Channel and Its Impact on Welfare

ABSTRACT

We consider a bilateral monopoly wherein a manufacturer can open a direct channel that is less efficient than the existing retailer. We show the following results. The manufacturer opens its direct channel if its bargaining power over the existing retailer is weak. Under quantity competition with homogeneous products, opening the direct channel is detrimental to social welfare if the direct channel's inefficiency level is low, but beneficial to social welfare if the inefficiency level is high. Under price competition with horizontally differentiated channels, opening the direct channel is detrimental to social welfare if the direct channel's inefficiency level is high.