Channel integration and profit sharing in the dynamics of multi-channel firms

With the rapid development of e-commerce, many brick and mortar firms are increasingly creating e-commerce channels that operate quite independently from existing physical channels, which lead to intensive channel conflicts. Channel integration with profit sharing can effectively eliminate channel conflicts and improve channel coordination for these multi-channel firms. In this study, we focus on the strategic role played by channel integration with profit sharing in the online-traditional channel competition. We use a game theoretic approach to investigate this issue. We compare non-integrated channel profits with integrated channel profits to show that both the online and traditional channels always benefit from a channel integration strategy by capturing some portion of the incremental profit gains generated by an integrated channel. We utilize a profit bargaining model to implement profit sharing for the online and traditional channels to achieve their channel integration. Based on our results, optimal marketing strategies are derived.