Mixed Channels for Apparel Sales

We study a clothing company which sells clothes through a traditional retail store and also sells clothes to the end customers through a direct online channel. The retail store offers some value-added services to the customers and is also given full authority to make pricing decision. Under this scenario, we present a mixed channel model to obtain optimal pricing decisions by both parties. We explore the amount of value adding by the retailer and determine the manufacturer’s optimal wholesale price to the retailer. Our model considers information asymmetry where the manufacturer has incomplete information about the retailer’s cost of adding value. We obtain closed-form contracts with incomplete information and compare them with those when complete channel coordination is present. We develop a number of managerial guidelines for clothing companies and identify future research topics.