After the emergence of the Internet, an interesting question arises that what is its impact on the firms’ channel and pricing strategies. This paper applies game theory to study the strategic interactions between rational manufacturers, retailers, and consumers, and it generates the following results: 1. The presence of the Internet allows imperfectly competitive manufacturers to better coordinate their pricing, targeting, and channel strategies, thereby minimizing the agency costs involved in common dealing at the traditional outlets, which in turn enhances the manufacturers’ profits. 2. Exclusive dealing may and may not become more prevalent in the presence of the Internet. It all depends on the ratio of the population of switchers to the entire population of consumers. 3. The presence of the Internet allows a monopolistic manufacturer to screen consumers by serving different people at different outlets. Screening is less effective, however, in the case of imperfect competition. 4. A dynamic adjustment process is obtained which describes how a manufacturer should optimally change his channel and pricing strategies when the population of the Internet purchasers grows over time.
Chou, Shan-Yu; Chen, Chyi-Mei; and Hsiao, Lu, "A Theory of Common Dealing with the Internet as an Innovative Distribution Channel" (2002). ICEB 2002 Proceedings. 185.