Pricing decision of a manufacturer in a dual-channel supply chain with asymmetric information

Abstract We construct and examine a screening model of a supply chain where a dominant manufacturer and a retailer operate under asymmetric information. In this model, the retailer adds an online channel to her offline store and can offer imperfect substitute products through these dual channels. We show that when the manufacturer can specify the retailer's resale prices for both offline and online channels, and when the retailer's reservation utility is market-type dependent, if the uncertainty in demand is high enough, the manufacturer pays zero information rent and extracts greater revenue. We find that the manufacturer should set the channel price—online and offline—based on multiple factors for each channel, such as uncertainty in demand, market size, and demand sensitivity to price.