When the manufacturer opens an online channel to compete with its retailer, effective mechanisms need to be utilized to coordinate the O2O (online to offline) distributions and thus higher profits can be achieved for all supply chain players. We first propose two mechanisms, which are the manufacturer’s financial support in reward points to the retailer and the profit sharing, for the supply chain players to employ in order to mitigate the O2O competition and create a Pareto result. Our results show that the manufacturer’s financial support in reward points to the retailer mechanism does alleviate the O2O competition and help improve the profit of each supply chain player; however, the retailer is reluctant to cooperate with the manufacturer to implement a profit sharing. We then propose a novel mechanism, which is the combination of the manufacturer’s financial support in reward points to the retailer with the profit sharing, to coordinate the O2O distributions. Our results show that such a mechanism effectively solves the issue of O2O competition and creates much higher profits for supply chain players. Furthermore, our results also show that compared to the simultaneous mode, the leader-follower Stackelberg mode provides no competitive advantage to the manufacturer or the retailer when the combination of the manufacturer’s financial support in reward points to the retailer with the profit sharing is utilized to coordinate the O2O distributions.

Introduction

Nowadays many manufacturers, such as Hewlett & Packard, Lenovo, Dell Computer, Mattel, Pioneer Electronics, P&G, and Haier, are using O2O (online to offline) channels to sell their products to consumers (Tsay and Agarwal, 2004; Chen et al., 2008; Amrouche and Yan, 2012). While more and more manufacturers are distributing their products through O2O channels, their retailers are concerning the O2O competition. Collett (1999) points out that some manufacturers such as Levi Strauss & Co. have stopped selling directly to consumers. Some of Home Depot’s manufacturers (e.g. Stanley Works) have given up their online plan after receiving the warning letter from Home Depot (Brooker, 1999). Keenan (1999) gives examples where the manufacturers took steps to explain to the retailers that the opened online channel is targeted to a different market segment. Sometimes, manufacturers use the online channel for information and sales support only, while leaving the actual sales to the retailers (Cohen, 2000). Chiang et al. (2003) show that online channel is not always detrimental to the retailers. Prior research (e.g. Tsay and Agrawal, 2004; Cattani et al., 2006; Yue and Liu, 2006; Mukhopadhyay et al., 2008; Yan, 2011) also propose some other coordinative mechanisms (e.g. sales efforts, information sharing, added retail services, brand differentiation) to alleviate the O2O competition. In this paper, we first propose two mechanisms, which are the manufacturer’s financial support in reward points (i.e. the manufacturer provides a financial support to the retailer to implement a reward points program) to the retailer and the profit sharing, for supply chain players to employ in order to mitigate the O2O competition and create a Pareto result.