We develop a two-period dual-channel model for a durable goods manufacturer to investigate how product durability and the channel structure create strategic issues that are significantly different from those in managing a dual channel for nondurables. The manufacturer can sell directly by its own e-channel and indirectly via an independent reseller. Our game-theoretic model nests Arya et al. (2007) [Arya et al., 2007. The bright side of supplier encroachment. Marketing Science 26 (5): 651-659.] as a special case when product durability reduces to zero and thus generalizes it to the durable goods setting. The equilibrium solutions indicate that, when the product is durable, both parties’ profitability strongly depends on product durability and direct selling cost. In particular, we find that, compared to encroaching the reseller’s market by direct selling online, it is optimal for the manufacturer to open an inactive e-channel that serves only as an information medium. Moreover, we find that, contrary to Arya et al.’s (2007) results, if product durability is moderate, for any direct selling cost, manufacturer’s encroachment is always detrimental to the reseller, and thus its bright side disappears. We test our model’s theoretical predictions of the effects of product durability on manufacturer’s and reseller’s profitability with data from the U.S. x86 computer server market, and find strong empirical supportprofitability of both parties is higher when product durability is sufficiently low or sufficiently high, and lower when durability is intermediate.

Introduction

Many durable goods manufacturers, including Lenovo, HP, Epson and IKEA, have adopted dual channels to market their products (Lenovo 2016, Hewlett Packard, Epson 2016, IKEA 2016). Durable goods pose a number of questions that are quite different from those in nondurable goods marketing (Desai and Purohit 1998, 1999). For example, when facing encroachment from an upstream agent (manufacturer), a downstream agent (reseller) of durable goods is in a more difficult position than the reseller of nondurable goods because with durable goods, the reseller is not only essentially competing with the new products from the manufacturer today but also dealing with the used units tomorrow. On the other hand, if consumers are able to anticipate the manufacturer’s incentive to increase product availability and lower prices, a time-inconsistency problem1 arises under which the manufacturer’s sequence of direct selling may not maximize both parties’ overall profitability2 . In practice, in some durable goods industries (e.g., the home furniture industry), 66% of manufacturers report Internet channel conflict3 as the largest obstacle to their online sales (Lee et al. 2003). Indeed, finding the best way to utilize the e-channel in conjunction with the reseller channel continues to be a challenge for many durable goods manufacturers. For example, in the personal computer market, to avoid alienating its resellers, HP chooses to sell direct only to its 1,000 largest accounts and leave the large accounts to the resellers. Unfortunately, the reverse seems to be happening—HP’s resellers are clashing with HP over direct sales—“We are now nervous about engaging with certain HP people; they have taken business direct even though the deal was registered and approached some of our longest standing customers,” said Repton boss Greg Carlow (MicroScope 2009). In contrast, Gateway closed all its manufacturer-owned retail stores in 2004 and now distributes its products through its direct Internet channel and independent retailers such as Best Buy and Costco (Yoo and Lee 2011). Particularly, among the durable goods manufacturers that adopt dual channels to consumers, the marketing strategies chosen by them are quite different from one another.