Strategic interactions between manufacturer channel choice and platform entry in a dual-market system

The full lifecycle concept has prompted sellers to provide ancillary services or products based on traditional product sales, leading to a dual-market system consisting of a base market and an add-on market. In this study, we consider a manufacturer selling base products through an online retail platform and then selling add-on products directly to consumers who have purchased base products. We investigate how the manufacturer’s distribution channel strategy in the base market interacts with the platform’s entry strategy in the add-on market. Results show that under the reselling (agency) channel, the platform’s entry of the add-on market enables the manufacturer to increase the wholesale price (reduce selling quantities to enjoy a higher margin) in the base market. We call this wholesale price effect (sales-control effect) caused by the platform’s entry. If the manufacturer adopts the agency (reselling) channel in the base market, the platform prefers (not) to enter the add-on market to compete with the manufacturer; if the manufacturer adopts the dual-channel, the platform enters only if both the commission rate and channel competition are high. Furthermore, the manufacturer prefers the dual-channel when both the commission rate and channel competition are low. Interestingly, due to the interactions between the two firms, the manufacturer will adopt the agency channel instead when the commission rate is extremely high. Finally, we examine conditions under which the platform has incentives to allow the manufacturer to change from a single-channel to a dual-channel in the base market.