European Journal of Operational Research xxx (2011) xxx–xxx

Contents lists available at SciVerse ScienceDirect

European Journal of Operational Research journal homepage: www.elsevier.com/locate/ejor

Production, Manufacturing and Logistics

‘‘Bricks vs. Clicks’’: The impact of manufacturer encroachment with a dealer leasing and selling of durable goods
Yu Xiong a,b, Wei Yan a,⇑, Kiran Fernandes c, Zhong-Kai Xiong a, Nian Guo a a School of Economics and Business Administration, Chongqing University, Chongqing, China
Queens University Management School, Queen’s University, Belfast, UK c The York Management School, The University of York, UK b article

info

Article history:
Received 24 October 2010
Accepted 15 August 2011
Available online xxxx
Keywords:
E-commerce
Distribution channels
Durable goods
Competitive strategy
Game theory

abstract
In durable goods markets, many brand name manufacturers, including IBM, HP, Epson, and Lenovo, have adopted dual-channel supply chains to market their products. There is scant literature, however, addressing the product durability and its impact on players’ optimal strategies in a dual-channel supply chain. To fill this void, we consider a two-period dual-channel model in which a manufacturer sells a durable product directly through both a manufacturer-owned e-channel and an independent dealer who adopts a mix of selling and leasing to consumers. Our results show that the manufacturer begins encroaching into the market in Period 1, but the dealer starts withdrawing from the retail channel in Period 2. Moreover, as the direct selling cost decreases, the equilibrium quantities and wholesale prices become quite angular and often nonmonotonic. Among other results, we find that both the dealer and the supply chain may benefit from the manufacturer’s encroachment. Our results also indicate that both the market structure and the nature of competition have an important impact on the player’s (dealer’s) optimal choice of leasing and selling. Ó 2011 Elsevier B.V. All rights reserved.

1. Introduction
In recent years, following the development of the Internet and information technology and the growth of third party logistics providers (Tsay and Agrawal, 2004), a growing number of manufacturers have found it attractive to supplement their preexisting retail channels with an e-channel. This tendency is particularly noticeable in the market for durable goods. For example, many brand name manufacturers, including IBM (Narisetti, 1998), HP (Janah,
1999), Epson, and Lenovo, have adopted dual channels to market their products. Yet, despite these emerging trends, little literature on the dual-channel supply chain pays attention to the issue of product durability and its impact on the interactions between manufacturer and dealer. We therefore develop a two-period dual-channel model to analyze the problem of marketing durable goods and address certain strategic issues associated with leasing and selling. To our knowledge, this paper is the first to consider the problem of durable goods marketing in a dual-channel supply chain. ⇑ Corresponding author. Tel.: +86 013212329507.
E-mail address: weiyancqu@gmail.com (W. Yan).

Our channel model captures three characteristics salient in many of today’s durable goods markets.1 First, because the manufacturer sells the products to customers through both a manufacturer-owned e-channel and an independent retail channel, customers can purchase the product through either channel. Second, in channels of distribution for durable products, intermediaries
(dealers) have an additional degree of freedom beyond what they have in channels for nondurables; that is, manufacturers typically sell their products to dealers who then either sell or lease them to consumers (Bhaskaran and Gilbert, 2009). Third, on a manufacturer-owned e-channel, a leasing strategy may be ruled out for practical reasons. For