Impact of channel power and fairness concern on supplier’s market entry decision

In a two-stage supply chain comprising a supplier and a retailer, we incorporate the concepts of channel power and fairness concern to analyze the supplier’s decision on whether to open an online direct channel or not. With an online channel, the supplier competes with its retailer in a dual-channel system, but the retailer may shift part or all orders to another supplier as the counteraction. Otherwise, the supplier only obtains the wholesaling profit but loses that from the online market. Taking the retail prices and the quality of the online product as decision variables, we show that the introduction of a direct channel leads to the decline of online product’s quality and retail price. Interestingly, we find that the retailer’s profit may be decreasing in its channel power. Comparing the outcomes with those from pure competing channels, we find that the retailer’s order shifting strategy may result in a lose–lose situation for the two firms, but it can be a credible threat to the supplier’s market entry. We also find that the supplier’s fairness concern may effectively reduce its incentives to open an online channel.