Product Differentiation Strategy in Dual-channel Supply Chain Faced with Free Riders

Abstract

With the rapid development of the Internet technology, an increasing number of firms operate dualchannel structure. Considering of the complexity and dynamic in the dual-channel market, it is necessary to carry out a simulation study. Consumers, who have access to both the physical retail store and the Internet channel, are potential free riders. The firm has a strategy to differentiate products in dual channels. It is found that (i) when consumers have little ex-ante product information, they would be highly motivated to consume in-store service. It is true in the situation that when firms promote innovative products to the market, consumers have to spend more energy to obtain relevant information and experience new products in physical stores. (ii) After in-store service, consumers would free ride to buy online, if the online searching cost is low, regardless of the product valuation. (iii) Firms usually try the best to please junior members and provide higher preferential benefit for them than that for senior members. (iv) When the price gap between online and offline channels is high, the offline profit decreases, but the online profit increases. The number of free riders is independent of the price gap, but decreases with the degree of product differentiation. This paper further considers the interaction between consumers and supply chain members, and uses multi-agent simulation to depict consumer behavior in multiple periods. The simulation results and sensitivity analyses indicate that (i) when consumers have enough information of products (e.g. daily necessaries), they tend to buy online directly instead of visiting the physical store. On the contrast, visiting is necessary when products are innovative, new high-tech or needed to be experienced, like perfume and apparel. (ii) Firms should reduce the in-store service cost and set the same price of the products in dual channels, to increase own profit. (iii) Firms should take action (e.g. advertising) to enhance consumer familiarity about products (iv) Product differentiation strategy weakens consumers’ free riding behavior and improves firms’ profit. Keywords—free riding; product differentiation strategy; dual-channel supply chain; multi-agent simulation