The Lally School of Management & Technology

Marketing Seminar

Lan Luo, Assistant Professor of Marketing

Marshall School of Business, University of Southern California

ABSTRACT:

In today’s marketplace, many product markets are characterized by the existence of a powerful retailer (e.g. Wal-Mart, Home Depot, and Toys R Us) as the gatekeepers of numerous new product introductions. While consumers may prefer more varieties, the scarcity of shelf-space has made it challenging for these retailers to provide a wide range of product offerings, which also makes it difficult for manufacturers to get their new products on the shelf of these dominant retailers. In recent years, many dominant retailers came to recognize that one avenue to expand its shelf-space is to establish online stores. From the retailers’ perspective, this is highly beneficial because these online offerings not only have the potential to expand the retailers’ customer base but also are typically less costly to carry. As a result, virtually all the dominant retailers are offering a great number of “online exclusive” products in their online stores. This rising popularity of online exclusive products also provides the manufacturers with a new opportunity to get their products on the “virtual” shelf of these dominant retailers. Within this context, we investigate the following questions. First, given the dominant retailer’s acceptance criteria for its online and offline offerings, how should the manufacturer position its new products? Namely, should the new product be designed to target the brick-and-mortar store, the online store, or both? Second, given the different channel outlets, how should the manufacturer set the wholesale price and quality of its new product accordingly? Finally, with the addition of this online exclusive option, how are the surpluses of the manufacturer, the retailer, and the total distribution channel affected? We develop an analytical model to answer these questions.

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