Advertising strategy and channel structure selection on an online retail platform

Abstract

PurposeThis paper considers a supply chain with a manufacturer (she) selling through an online retail platform (he) and studies the channel structure choices of two firms when investing in advertising.Design/methodology/approachThe authors assume that the platform provides the manufacturer with an agency and/or reselling channel; thus, there are three possible channel structures: agency channel, reselling channel and dual channel. By developing a game-theoretic model, the authors investigate the channel structure choices of two firms when advertising separately, simultaneously and cooperatively and analyze the optimal combination strategy of channel structure and advertising scheme for both firms.FindingsWhen the advertising efforts of the two firms are independent of each other, the equilibrium results show that different advertising schemes lead to different channel choices. For the manufacturer, it is optimal to choose the dual channel structure and adopt the advertising scheme that both subsidizes platform advertising and advertises on her own. For the platform, this combination is also optimal at a high commission rate; otherwise, the advertising scheme in which both firms advertise simultaneously is optimal and he is better off switching from the dual channel structure to the reselling channel structure as interchannel substitution intensity increases. The above results still hold for complementary advertising efforts and asymmetric marginal advertising costs, while in the case of substitutable advertising efforts, one firm may ride on another firm's advertising efforts, leading to different strategic combinations.Originality/valueThis paper not only provides useful guidance for manufacturers and platforms in channel selection and advertising strategy, but also theoretically enriches the literature on manufacturer encroachment.