Manufacturer rebate and channel coordination in O2O retailing

Many manufacturers are opening their own online channels due to the growth of e-commerce leading to intensive channel competition with their offline retailer partners. This research proposes an innovative coordination mechanism to lessen channel competition and help enhance the profits of all parties. First, two strategic mechanisms (i.e. a manufacturer rebate to offline consumers and the quantity discount) are proposed and studied. Our results show that although a manufacturer rebate offered to offline consumers helps mitigate the online-to-offline (hereafter O2O) competition conditionally, a quantity discount, unexpectedly, cannot be used to mitigate channel competition effectively. A new mechanism - the combination of the manufacturer rebate to offline consumers combined with a quantity discount to retailers – is developed to lessen channel competition. We find that compared to the first two mechanisms, the combination mechanism, surprisingly, provides a significant advantage in creating greater profits for the entire supply chain. Furthermore, compared to the benchmark O2O model, the combination mechanism also helps create a Pareto situation and thus is an optimal mechanism to be used to mitigate channel competition effectively.