Monopoly Versus Dual‐Channel Distribution With Multiple Retailers

Abstract

This paper examines how downstream competition shapes a manufacturer's decision to adopt a dual‐channel structure—supplying independent retailers via secret two‐part tariff contracts while also operating a direct channel. We show that the shape of the inverse demand function plays a key role in this decision. Under strictly concave demand, expanding total output raises price sensitivity, while the manufacturer responds less aggressively through its direct channel. These effects lead to a sharp price drop, discouraging aggressive retailer behavior and favoring a dual‐channel structure. In contrast, under strictly convex demand, output expansion reduces price sensitivity, and the manufacturer retreats aggressively. The resulting mild price decline leads each retailer to believe that its own output increase has little market impact, encouraging aggressive competition. As a result, with multiple retailers, the manufacturer may avoid supplying the indirect channel even when only two retailers are present. We further show that under the dual‐channel structure, a higher direct‐channel cost can increase consumer surplus by overly shifting output toward the more efficient indirect channel.