ONLINE EXTENSION AND CHANNEL BARGAINING POWER

Abstract

We study whether and how the introduction of an online channel by an upstream manufacturer impacts the bargaining power of the manufacturer vis-à-vis the downstream intermediary in the traditional channel. We leverage data on consumers’ staggered adoption of a large apparel manufacturer’s online channel and use a difference-in-differences approach to empirically identify our results. The results show that the adoption of the online channel enhances the manufacturer’s relative bargaining power, with a 1.5% reduction in commission rates accrued to the offline intermediaries. The increased bargaining power leads to an annual saving of approximately US$1.8 million for the manufacturer. We further demonstrate that the improvement in the manufacturer’s relative bargaining power comes from the increased value of the manufacturer's outside channel options of selling their products over physical stores. By investigating different roles played by the primitives of the online channel (i.e., online sales, the number of online orders fulfilled by the store, and the online return rate), we provide insights for manufacturers about how they can increase their bargaining power and revenue sharing in the traditional channel in the digital age.