Boiling Frogs: Pricing Strategies for a Manufacturer Adding a Direct Channel that Competes with the Traditional Channel

We analyze a scenario where a manufacturer with a traditional channel partner opens up a direct channel in competition with the traditional channel. We first consider that in order to mitigate channel conflict the manufacturer, who chooses wholesale prices as a Stackelberg leader, commits to setting a direct channel retail price that matches the retailer's price in the traditional channel. We find that the specific equal‐pricing strategy that optimizes profits for the manufacturer is also preferred by the retailer and customers over other equal‐pricing strategies. We next consider the implications of the equal‐pricing constraint through a numerical experiment that indicates that the equal‐pricing strategy is…