Online store as a new direct channel and emerging hybrid channel system

The surge of popularity of e-commerce not only generates numerous online sellers, but also leads many manufacturers to add direct online stores to their existing retail networks. Such a hybrid channel may enable a manufacturer to increase its market coverage and profit by customizing its product and service to the different needs of customer segments with separate channels. Conversely, the hybrid channel may lead to severe conflict and control problems because the manufacturer competes with its own retailers for the same customers. In contrast to the typical textbook advice, we show that hybrid channel using online marketing is optimal when customers are similar across segments in their valuations of retail services. The Internet has been adopted as a communication medium and eliminates boundary mechanisms which limit customers' channel switching. Consequently, a manufacturer's online store competes directly with its own retailers in the same market. Therefore, when service sensitive customers exhibit sufficiently large valuations of retail services, the manufacturer avoids price competition by eliminating online marketing and concentrates on the lucrative service sensitive segment with its brick-and-mortar retailers only