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Liu, C.;  Dan, B.;  Zhang, X.;  Zhang, H. Dual-Channel Supply Chain Coordination with Service Free Riding. Encyclopedia. Available online: https://encyclopedia.pub/entry/24229 (accessed on 07 July 2024).
Liu C,  Dan B,  Zhang X,  Zhang H. Dual-Channel Supply Chain Coordination with Service Free Riding. Encyclopedia. Available at: https://encyclopedia.pub/entry/24229. Accessed July 07, 2024.
Liu, Can, Bin Dan, Xumei Zhang, Haiyue Zhang. "Dual-Channel Supply Chain Coordination with Service Free Riding" Encyclopedia, https://encyclopedia.pub/entry/24229 (accessed July 07, 2024).
Liu, C.,  Dan, B.,  Zhang, X., & Zhang, H. (2022, June 20). Dual-Channel Supply Chain Coordination with Service Free Riding. In Encyclopedia. https://encyclopedia.pub/entry/24229
Liu, Can, et al. "Dual-Channel Supply Chain Coordination with Service Free Riding." Encyclopedia. Web. 20 June, 2022.
Dual-Channel Supply Chain Coordination with Service Free Riding
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This entry is adapted from the peer-reviewed paper 10.3390/jtaer17020041

Service free riding is a kind of strategic behavior that customers conduct to maximize their purchasing utilities. However, such behavior will make the retailer feel unjust because the manufacturer’s online channel takes away her would-be orders, which may further intensify channel competition and eventually lead to negative impacts on the overall supply chain performance. It is important to investigate how to coordinate a dual-channel supply chain composed of a manufacturer and a retailer when customers utilize the retailer’s service to conduct free-riding behavior. 

dual-channel supply chain channel conflict free riding experience service coordination

1. Background

In recent years, more and more manufacturers have chosen dual-channel distribution mode because of the gradual maturity of information technology. In China, electronic commerce has achieved rapid development [1]. It is reported that the trade sales are 2.06 billion dollars in 2021, accounting for 25% of the total social retail sales. Many manufacturers including Sony, Lenovo, Hewlett–Packard and Compaq are spurred to supplement their pre-existing offline channels with an online channel for the potential advantages, such as revenue growth, cost savings and expansion to new market segments [2][3].
Although the dual-channel distribution mode can bring the aforementioned advantages for manufacturers, it may not be good for retailers because customers will make choices on which channel to purchase from, which further leads to channel competition. To contend for the market, the retailers begin to build competitive advantages by providing experience services in the offline channel, including opportunities to experience the functions and learn essential knowledge about products from professional salesperson via timely Q&A communications, which cannot be available via the online channel [4][5]. These experience services in the offline channel play a crucial role in the process of customer’s purchasing decision. This is especially true for the products with obviously non-digital attributes. A survey by Mckinsey shows that 93% of the respondents say that they need to visit a physical store to experience before purchasing electronic products. The reason behind this is that the virtual pictures and texts in the online channel cannot describe the non-digital attributes of the products to customers. Thus, customers must touch and feel the products in the offline channel to make sure whether the products match their needs. When they decide to purchase, they will choose the channel that brings more utility to make final purchases after comparing the utilities between the online and the offline channels [6]. If they choose to stay and purchase in the offline channel, they can own the products immediately, but bear a higher retail price. Since the operating cost of a physical store is often higher than that of an online channel, the price in the offline channel is usually higher [7]. If customers switch to purchase in the online channel, they can own the products at a lower price but have to undertake uncertainties resulting from extra time and effort needed to search and check products online, payment security and after-sale services [8]. Once they find the latter can bring more utility, they will switch to the online channel and then become service free-riders. Service free riding refers to a kind of customer’s behavior of experiencing a product in an offline channel, but switching to a competitor’s online channel for a final purchase. Such behavior has been documented by industrial surveys and observations in the real world [7][9][10][11].
According to the purchasing process above, it can be seen that for customers, service free riding is a kind of strategic behaviors that customers conduct to maximize their purchasing utilities. However, such behavior will definitely make the retailer feel unjust because the manufacturer’s online channel takes away her would-be orders, which may further intensify channel competition and eventually lead to negative impacts on the overall supply chain performance.

2. Impacts of Customer Free-Riding Behavior

As the e-commerce emerges, scholars have attached importance to this new business mode and conducted extensive research on dual-channel supply chain management. To understand the impacts of dual-channel mode, many scholars pay attention to the issue of channel selection. That is, whether the manufacturer should introduce an online channel based on a pre-existing offline channel and what is the impact on the manufacturer and the retailer’s optimal decisions and profits [12][13][14]. Further, since the manufacturer generally distributes homogeneous products though both channels, the introduction of the online channel will inevitably pose a threat to the pre-existing offline channel owned by the retailer and lead to channel competition. Thus, a question arises for the manufacturer in how to mitigate channel competition between members and channels. Some scholars carry out research with regard to channel competition and supply chain coordination. For example, Yan and Pei [15] show channel competition can be effectively mitigated and supply chain efficiency can be improved after the implementation of the cooperative advertising strategy. Saha [16] considers a three-echelon dual-channel supply chain with price competition and propose a discount mechanism to make the supply chain coordinated. Zhang and Wang [17] explore whether a wholesale price contract with a fixed transfer payment can make the supply chain coordinated in the context of dynamic pricing. Yan et al. [18] combine revenue-sharing contract with reward points to mitigate competition and improve supply chain efficiency. Wang et al. [19] investigate how customer channel preference affects optimal pricing decisions and find that the traditional revenue sharing contract can coordinate the dual-channel supply chain.
To compete with the manufacturer’s online channel, it is an effective way for the retailer to retain and attract customers by providing experience services that are not available via the online channel. However, the experience service is likely to induce customers to become service free-riders, which further aggravates channel conflict and competition. Some scholars investigate the specific impacts of customer free-riding behavior. For example, Balakrishnan et al. [20] focus on customer free-riding behavior and find that such behavior will intensify price competition between channels. Further, Zhang et al. [21] simultaneously take into account free riding and sunk cost. They find that channel competition will be intensified by free-riding behavior, but be mitigated by the sunk cost. Guo et al. [22] analyze the impact of the degree of free riding on optimal decisions and profits under three power structures. They find that when the dual-channel retailer operates the online and offline channels separately, free riding will always make negative impact. In order to alleviate the negative impact of free riding, some scholars further put forward strategies. From the offline retailer’s view of point, Mehra et al. [23] put forward several measures to counter customer free-riding behavior. Jing [24] finds that the online retailer’s return policy can mitigate the competition by reducing free riding. However, these studies focus on free-riding in a dual-channel distribution with horizontal competition only.
The relationship between upstream and downstream members in a dual-channel supply chain becomes much more complicated. Several scholars focus on the free-riding issue under this more complicated scenario. For example, Liu et al. [25] incorporates fairness concern into supply chain members’ decision-making process and analyze how free riding influences optimal decisions. Li et al. [26] consider three service strategies and study how free riding influences pricing decisions and service strategy choice. Tian et al. [27] investigate how the existence of free-riding customers affects the manufacturer’s product strategy in the online and offline channels. Bian et al. [14] investigate the impact of customer free-riding behavior on the manufacturer’s choice of channel strategy between a direct online channel and an indirect online channel.
Besides analyzing the impact of free riding, some scholars further investigate how to cope with the adverse impact of free-riding via strategies and mechanisms. Xing and Liu [28] demonstrate that the retailer’s enthusiasm for providing service will be reduced by free riding. Then, they put forward a coordination mechanism with selective compensation rebate and price match to achieve service coordination. Dan et al. [29] consider two kinds of effects resulting from service provision, namely free-riding effect and competition effect, and put forward coordinating contracts according to the size of the two effects. To motivate the retailer to provide a high level of service and achieve supply chain coordination, Luo et at. [30] put forward a coordinating scheme according to the service level and order quantity. Pu et al. [31] and Zhou et al. [32] explore how the cost-sharing strategy affects supply chain performance and alleviates channel competition. Liu et al. [33] show that agency selling can not only mitigate the adverse impact of free riding, but also help supply chain members realize Pareto improvement. From the manufacturer’s point of view, Basak et al. [34] propose a two-part tariff with effort-sharing contract to cope with the adverse impact of free riding. Xu et al. [35] find that the impact of free riding coefficient on overall profit depends on customer channel preference and propose a supplier-revenue sharing contract to realize global optimal profit and supply chain members’ win–win situation. The aforementioned studies investigate the adverse impact of free riding, some of which further focus on how to mitigate the impact via kinds of strategies and contracts.

References

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Subjects: Management
Contributors MDPI registered users' name will be linked to their SciProfiles pages. To register with us, please refer to https://encyclopedia.pub/register :
Can Liu
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Bin Dan
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Xumei Zhang
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Haiyue Zhang
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Revisions: 2 times (View History)
Update Date: 21 Jun 2022
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