Pareto Improvement Strategy for Service-Based Free-Riding in a Dual-Channel Supply Chain

With the rapid development of the Internet, many manufacturers nowadays are increasingly adopting a dual-channel strategy to sell their products. In this paper, we present an analytical framework in a single-channel supply chain and a dual-channel supply chain, respectively. We compare the optimal service levels under different scenarios to investigate the impacts of bidirectional free-riding and service competition on members' decisions. In order to realize system optimization, we propose contracts to coordinate the decentralized supply chain under different cases. We find that when a new channel is added, the retailer will always increase his service level to compete with the manufacturer, while the manufacturer needs to take the relationship with the retailer into consideration and decides whether to increase or decrease her service level. We also find that the contracts for different cases can make the optimal solutions the same as those under the centralized scenario by adjusting service levels based on the relative size of competition effect and spillover effect. Finally, we conduct numerical examples to verify the existence of Pareto improvement intervals and derive some managerial insights.