How Potential Conflict Drives Channel Structure: Concurrent (Direct and Indirect) Channels

The authors study business-to-business manufacturers' simultaneous usage of vertically integrated (direct) and third-party (indirect) channels of distribution to serve one geographical market (possibly comprising several market segments) with the same product line. Most theoretical approaches to vertical integration of the distribution function pose the classic question of whether to forward integrate or use independent entities. Having concurrent channels means doing both. This phenomenon is poorly understood, even though it has been growing rapidly. The authors argue that under certain circumstances, it is impossible for manufacturers to prevent channel types from competing with each other, either because both channel types contact the same customer or because the customer sets them in competition against each other. The authors argue that when these situations are frequent or more consequential for the parties involved, firms reduce their usage of concurrent channels to prevent severe channel conflict. The authors posit five such circumstances. Using original data from prominent manufacturers operating in competitive markets worldwide, they model usage of both types of channels to cover one geography with the same products. They find substantial support for their model. Furthermore, in a subset of firms that use both channel types in the same market, they model the degree to which direct and indirect channels compete destructively against each other when contacting the same customers. The authors find that suppliers reduce such behavior by incurring costs to differentiate each channel's offerings, setting out "rules of engagement," and compensating both channel types when either one makes a sale.