New Product Design Under Channel Acceptance: Brick-and-Mortar, Online Exclusive, or Brick-and-Click

Many product markets today are characterized by the existence of a retailer (e.g., Home Depot, Toys R Us) that serves as gatekeeper of new product introductions. Recently, virtually all such retailers have established online stores to expand their shelf spaces as well as their customer bases. In these markets, the retailer is fully in control of: 1) whether or not to stock the new product; and 2) whether to carry the new product in his brick-and-mortar store, online only, or both. We examine how a manufacturer should design a new product in the presence of such a retailer. We find that the retailer's online-only option gives him additional leverage in accepting the manufacturer's new product offering into his physical store. In particular, the manufacturer may enhance the quality of the new product to ensure that the dual-channel retailer does not carry it as online exclusive. This in turn results in a higher profit for the retailer. When the retailer's participation constraint for carrying a new product offline is sufficiently high, the manufacturer's profit may also improve by designing a product of a lower quality for the retailer's online store.