How the agency contract fails in hybrid mode: agency fees and distribution sequences

Abstract We consider a supplier selling substituted products to an e‐retailer through wholesale selling mode or mixed use of wholesale and agency selling mode (hybrid contracts). This paper explains the curious failure of the agency model and investigates the contract selection problem. We build the stylized models that consider consumer formats preferences and distribution sequence. We find that an excessively high agency fee can lead to failure but this is on the condition of substituted products simultaneously distributed. However, we find no failure phenomenon in sequential distribution scenarios. Because it is optimal to mark down the price of the delayed product that prevents inefficiency with a lower price in the agency model than in the wholesale model. Furthermore, in the e‐books industry, when consumers prefer digital (traditional) formats, the equilibrium strategy is that the e‐retailer claims a low agency fee, and the supplier chooses simultaneous (sequential) distribution through hybrid contracts. Besides, the equilibrium is robust.