Manufacturer-retail platform interactions in the presence of a weak retailer

Abstract

Motivated by the emergence of dominant retail platforms operating using a store-within-a-store strategy, we study the interaction of such a retailer's decision on the selling format and a manufacturer's decision on the channel selection. The dominant retailer may elect to operate as a traditional reseller or a retail platform where the manufacturer manages his own store and pays a slotting fee and a portion of the revenue to the platform. The manufacturer makes the channel selection decision between the dominant retailer and a weak reseller. A Stackelberg game with the dominant retailer being the leader is formulated, and five relevant channel options are presented. We solve sub-games and characterise the equilibrium solution of the full game. Numerical studies shed light on the roles of the slotting fee and the outcomes of some prevailing selling formats in business practice. In particular, it is shown that the demand substitution between the dominant retailer and the weak retailer is crucial in determining channel selection.

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