# Collaborative Operation Model with Selling Profit Sharing Strategy for Direct Online Retailing

Authors: Qihui Lu; Axun Xing; Qi Sun; Di Xiao
Journal: Mathematical Problems in Engineering
 (2022)

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## Abstract

This study focuses on the operation mode choice issue on whether brand owners should use the autonomous or the collaborative operation mode in direct online retailing. Results demonstrate that when the service provider’s investment is relatively effective and the selling profit sharing ratio of the service provider is high, the brand owner should choose the collaborative operation mode. Surprisedly, we find that brand owners in a dual-channel scenario have more motivation to use the collaborative operation mode than those in a single e-commerce channel scenario. The e-commerce service market may have much potential in the future.


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## Body

## 1. Introduction

Online selling has been rapidly expanding in recent years. As e-commerce grows over time, it increasingly influences brand owners. Many brand owners, e.g., Dell, Sony, Hewlett Packard, Lenovo, Nike, and Estee Lauder, who may have distributed only through traditional offline retail channels, have begun using online channels to sell their products directly to consumers [1–5]. Numerous pure online brand owners, whose products are only sold online and who are without offline physical stores, have become primary players in the market. For example, the Handu Group, a famous e-commerce garment corporation in China, provides more than 70 kinds of pure e-commerce brands (https://www.htcases.com/kw/content/index.html?dbId=6).Unlike offline channel operation, online operation includes many specified e-commerce operation aspects, such as e-store construction, product image, online marketing and logistics, online customer service, and operation data analysis. Brand owners primarily adopt the autonomous operation mode for online sales, i.e., building an operations department or a branch institution to meet their online operation needs by themselves. However, given their limited capabilities in e-commerce channel operations, some brand owners do not achieve their desired outcome or even damage their business. For example, Metersbonwe Fashion and Accessories, the biggest Chinese home-grown apparel and fashion chain corporation, entered the e-commerce business and launched Bongo.com at the end of 2010. The YouFan app was then developed to sell directly to customers in 2015. Both attempts at e-commerce failed to achieve the desired goals. In the first half of 2015, the company lost RMB 95 million, and its sales dropped by 7% to RMB 2.8 billion (https://www.forbes.com/sites/russellflannery/2015/08/27/china-retail-billionaires-metersbonwe-posts-loss-as-e-commerce-squeeze-continues/#3589fea66d79).In order to improve their direct online selling, many brand owners with online and offline channels, such as Nike, Tissot, and Pandora, have broken away from the traditional autonomous operation mode in direct online channel and embraced the collaborative operation mode, i.e., operating their online channel with supporting from professional e-commerce service providers. This transformation is not achieved overnight, and usually goes through a gradual process. At the beginning, many brand owners only tentatively contacted e-commerce service providers and used them as channels for selling products. When brand owners have a deeper understanding of e-commerce service provider, they may establish cooperative relationships through information sharing and staff exchange. In the end, they may establish a closer cooperation relationship in the field of supply chain, and carry out collaborative operation in production planning, promotion, logistics, and many other aspects.Nowadays, brand e-commerce service providers can offer partial or full e-commerce solutions for brand owners, such as IT solutions, e-store operations, digital marketing, online customer services, warehousing, and fulfillment. Brand owners are usually responsible for production and logistics. It is worth noting that the operation of them is not separated, on the contrary, there are close relationship between them. For example, ShangBai e-commerce Company, a golden partner in Taobao.Com (a famous e-commerce platform in China) often optimizes the operation of the supply chain by providing e-commerce operation data and product improvement suggestions to brand owners. With the deepening of cooperation between the two sides, they will hold regular and irregular meetings to discuss various problems in direct online sales, and find solutions to realize the collaborative operation of the supply chain, which greatly improves the performance of the supply chain operation.The market size of brand e-commerce services in China has maintained a fast growth rate, having exceeded 200 billion yuan in 2020 and is expected to reach 295.09 billion yuan in 2021 (https://www.iimedia.cn/c460/78476.html). The brand e-commerce service industry continues to develop and is becoming mature, which provide a good opportunity for the development of service providers. Baozun, a NASDAQ company that provides e-commerce solutions in China and offers clients IT infrastructure setup and integration and online store design and setup, reached an online selling record of RMB 19.18 billion for its branded customers on November 11, 2021. In 2021, Baozuns total net revenue was RMB 9,396.3 million, up to 6.2% year-on-year (https://www.baozun.com/news-details.html?id=91).In online channels, selling cost includes information analysis, technical, designing, and product promotion costs [6, 7]. Reducing selling cost has a direct impact on brand owners’ profitability. Some service providers use public e-commerce platforms to provider their service. Some service providers even invest to set up their own service platforms. As a professional brand e-commerce service provider, its effect on cost reduction and efficiency is remarkable. Baozun independently developed an intelligent operation service platform called the Retail Operation Support System (ROSS). The ROSS has three smart tools, namely “designer”, “merchandiser”, and “activist”, which are, respectively, used in picture processing, product management, and activity management, helping the efficiency of brand merchants to increase by 70%. As a service provider serving more than 70 international fashion brands, BUY QUICKLY has successfully doubled the performance of the HUGO BOSS brand on the Tmall platform and increased its fans by 300% through accurate operation management. Based on the data bank, it also precipitates crowd portraits, continuously optimizes crowd strategies, and achieves secondary reach and conversion of target groups (https://www.buyquickly.com/brand-portfolio). Improved efficiency in cost control has led many brand owners to adopt enthusiastically the collaborative operation mode. In practice, brand owners pay for this efficient cost control by paying a fraction of the selling profit as the service fee (https://report.iresearch.cn/report/201707/3026.shtml). Service fees are one of the most common forms of cooperation under the collaborative operation model. In Baozun, for example, service revenue accounts for an increasing share of total revenue, rising from less than 25% in 2015 to over 50%. Compared with the traditional distribution model, the service way can generate greater profit margins, and the size of the service fee has a great impact on the brands’ collaborative operation decisions (https://www.baozun.com/news-details.html?id=91). Nowadays, selling profit sharing strategy is very popular in Chinese brand e-commerce service market.In the online channel, a key distinction between collaborative operation mode and autonomous operation mode is who sets the investment to reduce selling cost. In the autonomous operation mode, brand owners decide the investment level to reduce selling cost before setting the retail price in the market. However, in the collaborative operation mode, e-commerce service providers decide the investment level, and brand owners set the retail price. Brand owners need to share a certain fraction of the profit with service providers. Service providers need to bear investment costs. Nowadays, although the collaborative operation mode is becoming popular, some brand owners still adopt the autonomous operation mode to operate online channels. Thus, the two kinds of brand owners, pure e-commerce brand owners and dual-channel brand owners, must understand what key factors affect mode choice, and in which conditions the collaborative operation mode should be adopted. Although the existence of different operation modes in online selling is a conspicuous phenomenon, the quantitative studies on this phenomenon are scarce (https://www.cmcc-dut.cn/Cases/Detail/2824).Specifically, our objective is to study the following research questions in the context of e-commerce supply chains.(1)
How does service providers’ advantage in investment efficiency affect the mode preference of brand owners on collaborative operation in direct online selling?(2)
How does the selling profit sharing ratio affect the profit of brand owners and service providers in two kinds of channel scenarios?(3)
Do pure e-commerce and dual-channel brand owners have the same preference on the collaborative operation mode with selling profit sharing strategy?To capture the aforementioned issues, we consider two different scenarios. The first is the single-channel scenario, wherein brand owners are pure e-commerce brand owners. The second is the dual-channel scenario, wherein brand owners sell their products in an online channel and a conventional offline reseller channel. In each scenario, brand owners attempt to use collaborative operation modes. We assume that the online channel has selling cost, and supply chain players invest in online channel to reduce selling cost. To study the influence of the high investment efficiency of service providers, we assume that the investment efficiency of brand owners is lower than that of service providers, and the brand owners and service providers use a selling profit sharing contract in the collaborative mode.The remainder of the paper is organized as follows. Section2 reviews the relevant literature. Sections 3 and 4 investigate the single e-commerce channel scenario and the dual-channel scenario, respectively. Section 5 concludes this study with a discussion of practical implications. Appendix contains all proofs to the technical results.


## 2. Literature Review

Given that our study helps to explain why an e-commerce channel may not be operated by brand owners, our study is related to the operations management literature that focuses on outsourcing. Early works mainly focus on production outsourcing [8]. For example, Kaya [9] compared an outsourcing model and an in-house production model in a two-facility supply chain in which one of the parties can exert costly effort to increase demand. The study found that linear, quantity discount, and simultaneous revenue and cost-sharing contracts can coordinate the supply chain. Wang et al. [10] considered two outsourcing structures under push and pull contracts; the equilibrium production quantity is higher under control than under delegation for the push contract, whereas the reverse holds for the pull contract. Both supply chain members prefer control over delegation under the push contract. Recent studies have addressed issues related to service outsourcing in either cost reduction or demand enhancement. For example, Xia and Gilbert [11] investigated how investments in demand-enhancing services for a product line affect the interactions between brand owners and dealers. They advocated that promotional services can be provided by brand owners or delegated to dealers. They assumed that the service investments of brand owners and retailers are equally efficient. Bian et al. [12] studied the impact of service outsourcing under three supply chain power structures, namely brand owner-Stackelberg, vertical-Nash, and retailer-Stackelberg supply chains, while allowing supply chain members’ service efficiency to be different. Zhang et al. [13] explored outsourcing strategies for manufacturer warranty services in a dual-channel supply chain by which the demand-enhancing service can be undertaken by different supply chain parties, namely retailers, third-party service providers, and both simultaneously. From the perspective of a remanufacturing closed-loop supply chain, Gong et al. [14] studied a manufacturer outsources second-hand products’ collection and dismantling to a specialized dismantling firm. Also, the government encourages two firms to implement dismantling cooperation through monetary subsidy.Our work is not a simple extension of previous studies on outsourcing. First, existing outsourcing happens between upstream and downstream enterprises. For example, manufacturers deliver their after-sales services to retailers, or original equipment manufacturers outsource production to contract suppliers. The collaborative operation model proposed in our paper refers to a special kind of business process outsourcing in which brand owners outsource a part of their online business to professional third-party service providers. This outsourcing led to collaborative operation of brand owners’ direct online selling. Second, previous works have assumed that market demand is a function of the market price and the effort or service level of the supply chain members. We adopt a new modeling method in which the supply chain parties invest in online operation to reduce selling cost. Moreover, service providers have higher efficiency in investment than brand owners. This cost-reducing model is in line with the characteristics of an e-commerce operation.From the perspective of an e-commerce supply chain, this study is also closely related to the multiple-channel management literature. First, when manufacturers sell the same goods to retailers and directly to consumers, they need to understand how different product, cost, or service characteristics influence the equilibrium decisions and channel choice behavior of such a dual-channel supply chain [4]. For example, Bernstein et al. [15] showed that the adoption of e-commerce operations by traditional retailers arises from strategic necessity. Manufacturers may not benefit from the adoption of online sales, but consumers do. Dumrongsiri et al. [16] supposed that consumers choose the purchase channel on the basis of price and service qualities, and the results showed that adding a direct channel increases the overall profit. Yan et al. [6] discussed whether and under what conditions should the marketplace channel be introduced apart from the reseller channel by measuring the combined effects of the online spillover, the platform fee, and brand owners’ retailing inefficiency. Different from the previous works focusing on dual-channel pricing and channel strategy, a few new studies have investigated the role of the e-commerce platform [17]. In the collaborative operation mode, service partners cooperate with brands owner by using some leading platforms or a self-run platform.Second, channel competition and coordination in a multiple-channel e-commerce supply chain are considered in many works. For example, Ryan et al. [18] analyzed the impact of competition in an online marketplace system and the optimal decisions for the retailer and the marketplace firm; the study discussed whether the retailer should choose to sell through the marketplace system, and, if yes, at what price. Wang et al. [19] analyzed brand owners’ e-channel decision problem in which brand owners select a direct-sales channel or a third-party consignment channel to complement their existing physical retail channel. Yoon [20] extended that the spillover effect enhances retailers’ profit as long as the encroachment does not result in an extreme retail competition by a certain degree of product differentiation and ultimately generates Pareto gains in the supply chain. With the development of e-commerce platforms, many studies began investigating platform-based pricing and channel strategies. Biswas and Avittathur [21] considered a single-supplier-multiple-buyer supply chain network with a simultaneous price and inventory competition and showed that the options contract coordinates the supply chain and can eliminate channel conflict stemming from the competition. Matsui and Tsunoda [22] examine the feasibility of adopting exclusive sales areas when the manufacturer uses only a single retail channel or distributes products through dual-channel supply chains.The present study is also closely related to the literature on contract coordination in a multiechelon supply chain. Popular coordination mechanisms include cost-sharing, revenue sharing, profit-sharing, linear two-part tariffs, and quantity discount contracts. For example, Wang et al. [23] discussed a consignment contract with revenue sharing in which retailers deduct a percentage from the selling price of each item sold and remits the balance to suppliers. Fu et al. [24] developed a distributional robust Stackelberg game model to set profit-sharing terms using minimal information on demand and selling price decentralized supply chains. Gong et al. [25] compared revenue-sharing and profit-sharing models using a theoretical framework and investigated market participants’ performance under different schemes. Several studies in the literature analyzed coordination contracts by considering brand owner effort or retailer effort. Cachon [26] stated that coordination with an effort-dependent stochastic demand model is complex when the firms are not allowed to establish a direct contract on the effort level. He et al. [27] claimed that suppliers fail to coordinate the supply chain with buy-back, revenue sharing, quantity flexibility, or sales rebate contracts; various contracts were also considered to coordinate a supply chain with sales effort and price-dependent stochastic demand. They show that a properly designed returns policy with a sales rebate and a penalty contract can achieve channel coordination. Zha et al. [28] investigated the effort of a service platform in cooperation with a hotel and its influence on the hotel’s decision regarding the number of reserved rooms. Ma et al. [29] proposed two-part tariff contracts for the symmetric and asymmetric cases to maximize retailers’ profit and improve contract manufacturers’ commitment to corporate social responsibility. In the present study, the contract in the collaborative operation model is different from the above literature. Following business practice, we assume that brand owners and service providers share the selling profit in the e-commerce direct selling, but service providers still burden all selling investment cost in the online channel. Moreover, we consider this contract both in single-channel and dual-channel scenarios.


## 3. Single e-Commerce Channel Scenario

Pure e-commerce brand owners are those whose products are all sold only in online channels and not in offline brick-and-mortar stores. The most common pure online brands are those that rely on the rapidly developing Internet and are developed through online sales channels such as Taobao. In this section, we consider the single e-commerce channel scenario when brand owners produce a product that they may directly online sell to customers by using their online retail sector or selling products with a collaborative operation mode.


### 3.1. Model Description

In the single e-commerce channel scenario as shown in Figure1, the final retail price P is assumed to be an inverse demand function P=a−q, where q is the quantity in the channel and a denotes the basic market demand. Without loss of generality, we normalize brand owners’ unit production cost to zero. In the online channel, a basic unit online selling cost exists, which is denoted by m. To ensure that the results in the following analysis are meaningful, we suppose m<a/2. In a real business, online selling cost includes many aspects. First, information analysis cost exists. The positioning of consumer groups is inseparable from the support of relevant data, the industry positioning, and brand positioning of the e-store. Quarterly and annual plans are made for the online store. Second, technical cost exists, which includes website maintenance or assistance costs for enterprises to enter the platform mall and become professional consultants to communicate with the platform. Third, designing cost exists, which refers to the arrangement of the goods and the packaging design of each product, such as the setting of commodity details on e-commerce platforms. Fourth, product promotion cost exists, which includes the use of online publicity or appropriate promotional means. In line with practice, we assume that the basic online selling cost under the autonomous mode and under collaborative mode are the same.Figure 1
The single-channel direct-sales system.
(a)(b)Moreover, brand owners or service providers can invest in online selling to reduce the selling cost. Similar settings are not uncommon in the relevant literature. Yoon [20] explained encroachment behavior may boost the manufacturer to make a cost-reducing investment about production process improvements and technology innovation. Li and Zhou [30] studied a monopoly upstream manufacturer invests in cost improvement to reduce the initial production costs. Following the setup of Yoon [20]; we denote the investment level as I, where I∈0,1 and the unit selling cost becomes m1−I, which means that a higher investment level leads to lower unit selling cost.


### 3.2. Benchmark Model: Autonomous Operation Mode

The autonomous operation mode is a benchmark mode, where brand owners sell a product through their online retail sector. In line with the reality, the marginal cost on the investment is increasing with the investment level. We suppose that brand owners’ selling investment cost isγbmI2/2, where γb is the selling investment efficiency indicator in the autonomous operation mode [31, 32]. Higher value of γb means lower selling investment efficiency. We use superscription ‘as’ to denote the autonomous operation mode in a single e-commerce channel. All the basic notations are listed in Table 1.Table 1
Summary of basic notation.
ParametersaThe basic demandpUnit retail price in single-channelpRUnit retail price in dual-channelpBUnit online price in dual-channelmUnit selling cost in online channelγbThe selling investment efficiency in autonomous operationγsThe selling investment efficiency in collaborative operationRThe selling profit sharing ratio of the brand ownerwThe brand owner’s offline wholesale price in dual-channelDecision variablesIThe investment levelqThe retailer’s order quantity in single-channelqRThe retailer’s order quantity in dual-channelqBThe online order quantity in dual-channelIn the autonomous operation mode, brand owners first decide the investment levelI and then determine the quantity q by maximizing profit function ΠBas=a−q−m1−Iq−γbmI2/2. After solving the first-order condition, we obtain the optimal decision qas=a−m1−I/2. Given the optimal quantity, brand owners determine the optimal investment level I to maximize their profit ΠBas=a−qas−c+m1−Iqas−γbmI2/2. The optimal investment level is Ias=a−m/m2γb−1. To eliminate the trivial cases Ias=1, we suppose γb>a/2m. Correspondingly, the optimal quantity is qas=γba−m/2γb−1, and the brand owners and supply chains’ maximum profit is ΠBas=Πscas=γba−m2/22γb−1.


### 3.3. When to Choose the Collaborative Operation Mode in Direct Online Selling

We now consider the collaborative operation mode in direct online selling in which brand owners sell products through online channels in cooperation with e-commerce service providers. We use the superscription “cs” denotes the case with the collaborative operation mode in a single e-commerce channel. The investment level I is then decided by service providers, and the investment cost of service providers is γsmI2/2, where γs is the selling investment efficiency in the collaborative operation mode. Higher value of γs means lower selling investment efficiency of the service provider. From the professional capability of online operation, we suppose that service providers have high investment efficiency (i.e., γs<γb). The notations for all thresholds are shown in Table 2.Table 2
Summary of notation of thresholds.
Rlowcs=1−2mγs/aγ^cs=a/a+mγ˜cs=R¯21+Rγb+R¯+2γb−12γb1+R2−R¯2/4γ^1cs=2m2a−mγb−a2/2am2γb−1γ^2cs=2γb−2γb/2γb−1R^cs=maxRlowcs,α−β+γs2γb−1α−2β/γbR˜cs=maxRlowcs,α−β−γs2γb−1α−2β/γbγ˙cs=a2R/2a2R−a−m2γ¯cs=R¯/2⋅2γb+2γbR2γb−1/2R¯γb+RRlowcd=1−9mγs/4a+wγˇcd=44a+w/9a+2m+wγ^cd=44a−8m+w/9a−2m+wR⟶cd  =  3γsa−2m+w+4w9γs−8/83γsa−2m+w−4wγ¯cd  =  4R¯/3⋅3a−2m+wγb−2w/4a−8m+wR¯cd  =  1−34a−8m+wγs/12a−2m+wγb−8wAccording to actual practice and some research [25], service providers and brand owners share the total selling profit in the collaborative operation mode. We denote R as the selling profit sharing ratio of brand owners, and R¯=1−R is the sharing ratio of service providers. The ratio R is negotiated between brand owners and service providers before selling products. In line with the real practice, we suppose that brand owners’ share is larger than 1/2 (i.e., R>1/2). However, service providers must burden all the investment cost to reduce the unit selling cost in the supply chain.Thus, in the collaborative operation mode with selling profit sharing strategy, the brand owners’ profit function isΠBcs=Ra−q−m1−Iq. We also solve the first-order condition and obtain the optimal decision qcs=a−m1−I/2. Service providers determine the optimal investment level to reduce selling cost by maximizing the profit function ΠScs=R¯a−qcs−m1−Iqcs−γsmI2/2. The optimal investment level is Ics=R¯a−m/m2γs−R¯. To eliminate the trivial cases Ics=1, we suppose γs>aR¯/2m, which equals to R>Rlowcs, where Rlowcs=1−2mγs/a. Correspondingly, the optimal quantity is qcs=γsa−m/2γs−R¯; the profit of brand owners and service providers are given as(1)ΠBcs=γs2a−m2R2γs−R¯2,ΠScs=γsa−m2R¯22γs−R¯,and the supply chain’s profit is(2)Πsccs=γs2γs−R¯2a−m222γs−R¯2.Proposition 1.
In the single e-commerce channel with collaborative operation mode, there are(1)
dIcs/dγs<0, dqcs/dγs<0, dΠScs/dγs<0, dΠsccs/dγs<0;(2)
dIcs/dR<0, dqcs/dR<0, dΠScs/dR<0, dΠsccs/dR<0;(3)
dIcs/dm<0, dqcs/dm<0, dΠScs/dm<0, dΠsccs/dm<0.γs reflects service providers’ investment efficiency. A lower γs value means higher efficiency. Proposition 1 (1) confirms that the high efficiency of service providers leads to further investment in selling, additional order quantity, and reduced sale price. Correspondingly, service providers and the supply chain benefit from the high efficiency of service providers. Proposition 1 (2) shows that, when service providers gain further sharing in the total selling profit (i.e., R becomes smaller), they have an increased incentive to invest further on selling cost reduction. As such, brand owners set additional quantity in the channel, which leads to a reduced retail price. Thus, service providers and the whole supply chain obtain extra profit with the high profit sharing of service providers. As the unit selling cost m rises, as shown in Proposition 1 (3), the investment level, quantity, profit of service providers, and total profit become small.Proposition 2.
In the single e-commerce channel with collaborative operation mode, there aredΠBcs/dγs<0, dΠBcs/dm<0, and(1)
whenγs≤γ^cs, for anyR∈Rlowcs,1, dΠBcs/dR<0;(2)
whenγ^cs<γs<1: whenR∈Rlowcs,2γs−1, dΠBcs/dR>0, whenR∈2γs−1,1, dΠBcs/dR<0;(3)
when1≤γs<γb, for anyR∈Rlowcs,1, dΠBcs/dR>0.As shown in Proposition2, dΠBcs/dγs<0 and dΠBcs/dm<0 exist, which means that low investment efficiency and large selling cost cause brand owners’ difficulty to make profit. These results are consistent with our intuition. However, brand owners do not frequently prefer a large share ratio in the collaborative operation mode. Proposition 2 indicates that the changing rule of brand owners’ profit function is closely related to the investment coefficient γs and sharing R. In the analysis, we consider the feasible region R∈Rlowcs,1. Brand owners’ profit decreases in R when service providers’ investment efficiency is high. Brand owners’ profit increases in R when service providers’ investment efficiency is low. Brand owners’ profit increases and then decreases in R when service providers’ investment efficiency is in the middle. We now explore the reasons for this situation. Brand owners’ profit function can be expressed as ΠBcs=Rqcs2, and we know that dqcs/dR<0. Thus, the increase in R increases brand owners’ profit ratio and reduces order quantity. Thus, when γs is small, the order quantity is large. The increase in R can dramatically reduce order quantity, which plays a dominant role in the profit function of brand owners. Thus, ΠBcs decreases in R. By contrast, when γs is large, the order quantity is relatively small. The increase in R slightly reduces the order quantity, and the main impact on profit function is the sharing R. Thus, ΠBcs increases in R.The above results reveal that, when brand owners cooperate with a highly efficient service provider, they should distribute profit to service providers as much as possible within a feasible extent. Doing so will not lead to a decline in the profit of brand owners but will help improve their profit. The reason is that service providers will make more effort to enlarge the market scale when they are motivated by high-profit distribution. Thus, the profit obtained by brand owners is far greater than those allocated to service providers. However, we do not recommend adopting the above strategies when brand owners cannot find efficient service providers but can only choose moderately efficient service providers. As the profit of brand owners increases first and then decreases with the increase of profit distribution ratioR, the optimal strategy is to choose an appropriate profit distribution ratio to maximize their profit.Proposition 3.
In the single e-commerce channel with collaborative operation mode, there are:(1)
whenaR¯/2m<γs≤R¯γb, there is,Ics≥Ias,qcs≥qas; otherwise, there isIcs<Ias,qcs<qas;(2)
whenaR¯/2m<γs≤γ˜cs, there isΠsccs≥Πscas; otherwise, there isΠsccs<Πscas;(3)
for anyaR¯/2m<γs<γb, there isΠScs>0.Proposition3 (1) shows that, if service providers’ investment efficiency is higher than that of brand owners’ (i.e., aR¯/2m<γs≤R¯γb), then service providers will invest more than brand owners to reduce selling cost, and brand owners will set higher order quantity in the collaborative operation mode; otherwise, service providers will invest less and brand owners will set a lower quantity. This result comes from the monotonicity of Ics on γs. Proposition 3 (2) indicates that, if service providers’ investment is effective, then, the total profit in the collaborative operation mode is more than that in the autonomous operation mode. Otherwise, the total profit in the collaborative operation mode is less. This result comes from the monotonicity of Πsccs on γs. Proposition 3 (3) shows that service providers will consistently obtain positive profit when brand owners use the collaborative operation mode.Proposition3 shows that, when the investment efficiency of service providers is high, they will be profitable, and the profit of the whole supply chain will be higher than that when brand owners adopt autonomous operation in direct online selling. Thus, the Tmall platform, which is engaged in e-commerce business under Alibaba, will spare no effort to cultivate high-quality service providers, such as actively helping e-commerce service providers to improve their service capabilities through training, professional counseling, selection of gold partners, and organizing experience sharing meetings.Proposition 4.
(1)
Consider the scenarioa/2m<γb<a2/2m2.(a)
Caseγs≤γ^1cs. When R∈Rlowcs,R^cs, ΠBcs≥ΠBas; when R∈R^cs,1, ΠBcs<ΠBas.(b)
Caseγ^1cs<γs<γb. For any R∈Rlowcs,1, ΠBcs<ΠBas.(2)
Consider the scenarioγb≥a2/2m2.(a)
Caseγs≤γ^cs. When R∈Rlowcs,R^cs, ΠBcs≥ΠBas; when R∈R^cs,1, ΠBcs<ΠBas;(b)
Caseγ^cs<γs<γ^2cs. When R∈Rlowcs,R˜cs, ΠBcs<ΠBas; when R∈R˜cs,R^cs, ΠBcs≥ΠBas; when R∈R^cs,1, ΠBcs<ΠBas.(c)
Caseγ^2cs≤γs<γb. For any R∈Rlowcs,1, ΠBcs<ΠBas.The results in Proposition2 illustrate the changing rules of ΠBcs on R in three kinds of cases of γs. Moreover, ΠBas depends on γb. Thus, the investment efficiency of brand owners γb, the efficiency of service providers γs, and the sharing ratio R influence brand owners’ preference of online operation. On the one hand, Proposition 4 states when brand owners should choose the collaborative operation mode in direct online selling. First, no matter how inefficient brand owners’ investment is, as long as their service providers’ investment efficiency is relatively effective, if brand owners use relatively small sharing R, then brand owners can benefit from adopting the collaborative operation mode. Second, when the investment efficiency of service providers is medium, brand owners’ efficiency is low, and the sharing R is in the middle, the brand owners should choose the collaborative operation mode. On the other hand, Proposition 4 states that brand owners should choose to operate by themselves when their service providers’ investment efficiency is relatively low; or when the service providers’ efficiency is relatively effective, but the sharing R is high; or when the service providers’ efficiency is medium, the brand owners’ efficiency is low, and the sharing R is large or small. According to the above analysis, when the investment efficiency of service providers is low, brand owners should not use the collaborative operation mode in all cases. If service providers’ investment efficiency is relatively high and the suitable profit distribution ratio R can be reached with service providers through negotiation, the collaborative operation is a better choice than the autonomous operation for brand owners.We consider two scenarios in Figure2 (where a=100, m=20) for a detailed illustration of Proposition 4. We analyze the strategic choice of brand owners from the perspective of investment efficiencies and sharing ratio. Region A represents when brand owners should choose the collaborative operation mode, and Region B represents when brand owners should choose the autonomous operation mode. Figure 2 shows that the threshold R^cs decreases on γs. Thus, when service providers are relatively efficient, brand owners can require the relatively high sharing of the total profit in the collaborative operation mode, whereas service providers are relatively inefficient and only require relatively low sharing. Therefore, for brand owners, selecting high-quality service providers is a key problem that they must pay attention to, and determining whether potential service providers meet their requirements through careful observation and multiple negotiations is necessary. For example, Midea Company, a well-known home appliance manufacturer in China, had many meetings with its senior managers to understand the operational efficiency and capability of Shangbai e-commerce before making it the company’s service provider (https://www.cmcc-dut.cn/).Figure 2
Mode preference of the brand owner under differentγs and R. (a) Scenario γb=5. (b) Scenario γb=15.
(a)(b)Proposition 5.
(1)
Consider the scenarioR≤a−m2/a2,ΠBcs<ΠBas.(2)
Consider the scenarioa−m2/a2<R<a−m/a.(a)
Casea/2m<γb≤γ˙cs. For any γs∈aR¯/2m,γb, ΠBcs≤ΠBas.(b)
Caseγb>γ˙cs. When γs∈aR¯/2m,γ¯cs, ΠBcs≥ΠBas; when γs∈γ¯cs,γb, ΠBcs<ΠBas.(3)
Consider the scenarioa−m/a<R<1. Whenγs∈aR¯/2m,γ¯cs, ΠBcs≥ΠBas; whenγs∈γ¯cs,γb, ΠBcs<ΠBas.Proposition5 also analyzes the problem of when brand owners should choose the collaborative operation mode. In contrast to Proposition 4, we consider three scenarios of the sharing ratio R. Brand owners should choose collaborative operation in two cases: (1) the sharing R is in the middle, brand owners’ investment is inefficient, and service providers’ investment is efficient; (2) the sharing R is large, and service providers’ investment is efficient. Brand owners should choose to operate by themselves in four cases: (1) the sharing R is small; (2) the sharing R is large, and the investment efficiency of service providers is relatively low; (3) the sharing R is middle, and the efficiency of brand owners is high; (4) the sharing R is middle, and the efficiencies of brand owners and service providers are all relatively low.The above discussion shows that the choice of autonomous operation or collaborative operation is clear in most situations. However, in the following two cases, the choice of operation mode by brand owners depends on the investment efficiency of service providers. First, when a medium profit sharing is allocated by brand owners to service providers and the investment efficiency of brand owners is low, if the efficiency of service providers is high then brand owners will benefit more when they choose the collaborative operation mode, but if the efficiency of service providers is low then brand owners should choose the autonomous operation mode. Moreover, if a relatively high profit sharing is allocated by brand owners to service providers, the brand owners’ choice of operation mode is similar to the above situation. Thus, it will not be described again.Figure3 (where a=100, m=20) presents a detailed illustration of Proposition 5, where Region A stands for the region where brand owners should choose the collaborative operation, and Region B stands for the region where brand owners should operate by themselves. The γ¯cs increases on γb, which implies that efficient brand owners must choose equally efficient service providers before choosing profit sharing.Figure 3
Mode preference of the brand owner under differentγb and γs. (a) Scenario R = 0.7. (b) Scenario R = 0.9.
(a)(b)


## 3.1. Model Description

In the single e-commerce channel scenario as shown in Figure1, the final retail price P is assumed to be an inverse demand function P=a−q, where q is the quantity in the channel and a denotes the basic market demand. Without loss of generality, we normalize brand owners’ unit production cost to zero. In the online channel, a basic unit online selling cost exists, which is denoted by m. To ensure that the results in the following analysis are meaningful, we suppose m<a/2. In a real business, online selling cost includes many aspects. First, information analysis cost exists. The positioning of consumer groups is inseparable from the support of relevant data, the industry positioning, and brand positioning of the e-store. Quarterly and annual plans are made for the online store. Second, technical cost exists, which includes website maintenance or assistance costs for enterprises to enter the platform mall and become professional consultants to communicate with the platform. Third, designing cost exists, which refers to the arrangement of the goods and the packaging design of each product, such as the setting of commodity details on e-commerce platforms. Fourth, product promotion cost exists, which includes the use of online publicity or appropriate promotional means. In line with practice, we assume that the basic online selling cost under the autonomous mode and under collaborative mode are the same.Figure 1
The single-channel direct-sales system.
(a)(b)Moreover, brand owners or service providers can invest in online selling to reduce the selling cost. Similar settings are not uncommon in the relevant literature. Yoon [20] explained encroachment behavior may boost the manufacturer to make a cost-reducing investment about production process improvements and technology innovation. Li and Zhou [30] studied a monopoly upstream manufacturer invests in cost improvement to reduce the initial production costs. Following the setup of Yoon [20]; we denote the investment level as I, where I∈0,1 and the unit selling cost becomes m1−I, which means that a higher investment level leads to lower unit selling cost.


## 3.2. Benchmark Model: Autonomous Operation Mode

The autonomous operation mode is a benchmark mode, where brand owners sell a product through their online retail sector. In line with the reality, the marginal cost on the investment is increasing with the investment level. We suppose that brand owners’ selling investment cost isγbmI2/2, where γb is the selling investment efficiency indicator in the autonomous operation mode [31, 32]. Higher value of γb means lower selling investment efficiency. We use superscription ‘as’ to denote the autonomous operation mode in a single e-commerce channel. All the basic notations are listed in Table 1.Table 1
Summary of basic notation.
ParametersaThe basic demandpUnit retail price in single-channelpRUnit retail price in dual-channelpBUnit online price in dual-channelmUnit selling cost in online channelγbThe selling investment efficiency in autonomous operationγsThe selling investment efficiency in collaborative operationRThe selling profit sharing ratio of the brand ownerwThe brand owner’s offline wholesale price in dual-channelDecision variablesIThe investment levelqThe retailer’s order quantity in single-channelqRThe retailer’s order quantity in dual-channelqBThe online order quantity in dual-channelIn the autonomous operation mode, brand owners first decide the investment levelI and then determine the quantity q by maximizing profit function ΠBas=a−q−m1−Iq−γbmI2/2. After solving the first-order condition, we obtain the optimal decision qas=a−m1−I/2. Given the optimal quantity, brand owners determine the optimal investment level I to maximize their profit ΠBas=a−qas−c+m1−Iqas−γbmI2/2. The optimal investment level is Ias=a−m/m2γb−1. To eliminate the trivial cases Ias=1, we suppose γb>a/2m. Correspondingly, the optimal quantity is qas=γba−m/2γb−1, and the brand owners and supply chains’ maximum profit is ΠBas=Πscas=γba−m2/22γb−1.


## 3.3. When to Choose the Collaborative Operation Mode in Direct Online Selling

We now consider the collaborative operation mode in direct online selling in which brand owners sell products through online channels in cooperation with e-commerce service providers. We use the superscription “cs” denotes the case with the collaborative operation mode in a single e-commerce channel. The investment level I is then decided by service providers, and the investment cost of service providers is γsmI2/2, where γs is the selling investment efficiency in the collaborative operation mode. Higher value of γs means lower selling investment efficiency of the service provider. From the professional capability of online operation, we suppose that service providers have high investment efficiency (i.e., γs<γb). The notations for all thresholds are shown in Table 2.Table 2
Summary of notation of thresholds.
Rlowcs=1−2mγs/aγ^cs=a/a+mγ˜cs=R¯21+Rγb+R¯+2γb−12γb1+R2−R¯2/4γ^1cs=2m2a−mγb−a2/2am2γb−1γ^2cs=2γb−2γb/2γb−1R^cs=maxRlowcs,α−β+γs2γb−1α−2β/γbR˜cs=maxRlowcs,α−β−γs2γb−1α−2β/γbγ˙cs=a2R/2a2R−a−m2γ¯cs=R¯/2⋅2γb+2γbR2γb−1/2R¯γb+RRlowcd=1−9mγs/4a+wγˇcd=44a+w/9a+2m+wγ^cd=44a−8m+w/9a−2m+wR⟶cd  =  3γsa−2m+w+4w9γs−8/83γsa−2m+w−4wγ¯cd  =  4R¯/3⋅3a−2m+wγb−2w/4a−8m+wR¯cd  =  1−34a−8m+wγs/12a−2m+wγb−8wAccording to actual practice and some research [25], service providers and brand owners share the total selling profit in the collaborative operation mode. We denote R as the selling profit sharing ratio of brand owners, and R¯=1−R is the sharing ratio of service providers. The ratio R is negotiated between brand owners and service providers before selling products. In line with the real practice, we suppose that brand owners’ share is larger than 1/2 (i.e., R>1/2). However, service providers must burden all the investment cost to reduce the unit selling cost in the supply chain.Thus, in the collaborative operation mode with selling profit sharing strategy, the brand owners’ profit function isΠBcs=Ra−q−m1−Iq. We also solve the first-order condition and obtain the optimal decision qcs=a−m1−I/2. Service providers determine the optimal investment level to reduce selling cost by maximizing the profit function ΠScs=R¯a−qcs−m1−Iqcs−γsmI2/2. The optimal investment level is Ics=R¯a−m/m2γs−R¯. To eliminate the trivial cases Ics=1, we suppose γs>aR¯/2m, which equals to R>Rlowcs, where Rlowcs=1−2mγs/a. Correspondingly, the optimal quantity is qcs=γsa−m/2γs−R¯; the profit of brand owners and service providers are given as(1)ΠBcs=γs2a−m2R2γs−R¯2,ΠScs=γsa−m2R¯22γs−R¯,and the supply chain’s profit is(2)Πsccs=γs2γs−R¯2a−m222γs−R¯2.Proposition 1.
In the single e-commerce channel with collaborative operation mode, there are(1)
dIcs/dγs<0, dqcs/dγs<0, dΠScs/dγs<0, dΠsccs/dγs<0;(2)
dIcs/dR<0, dqcs/dR<0, dΠScs/dR<0, dΠsccs/dR<0;(3)
dIcs/dm<0, dqcs/dm<0, dΠScs/dm<0, dΠsccs/dm<0.γs reflects service providers’ investment efficiency. A lower γs value means higher efficiency. Proposition 1 (1) confirms that the high efficiency of service providers leads to further investment in selling, additional order quantity, and reduced sale price. Correspondingly, service providers and the supply chain benefit from the high efficiency of service providers. Proposition 1 (2) shows that, when service providers gain further sharing in the total selling profit (i.e., R becomes smaller), they have an increased incentive to invest further on selling cost reduction. As such, brand owners set additional quantity in the channel, which leads to a reduced retail price. Thus, service providers and the whole supply chain obtain extra profit with the high profit sharing of service providers. As the unit selling cost m rises, as shown in Proposition 1 (3), the investment level, quantity, profit of service providers, and total profit become small.Proposition 2.
In the single e-commerce channel with collaborative operation mode, there aredΠBcs/dγs<0, dΠBcs/dm<0, and(1)
whenγs≤γ^cs, for anyR∈Rlowcs,1, dΠBcs/dR<0;(2)
whenγ^cs<γs<1: whenR∈Rlowcs,2γs−1, dΠBcs/dR>0, whenR∈2γs−1,1, dΠBcs/dR<0;(3)
when1≤γs<γb, for anyR∈Rlowcs,1, dΠBcs/dR>0.As shown in Proposition2, dΠBcs/dγs<0 and dΠBcs/dm<0 exist, which means that low investment efficiency and large selling cost cause brand owners’ difficulty to make profit. These results are consistent with our intuition. However, brand owners do not frequently prefer a large share ratio in the collaborative operation mode. Proposition 2 indicates that the changing rule of brand owners’ profit function is closely related to the investment coefficient γs and sharing R. In the analysis, we consider the feasible region R∈Rlowcs,1. Brand owners’ profit decreases in R when service providers’ investment efficiency is high. Brand owners’ profit increases in R when service providers’ investment efficiency is low. Brand owners’ profit increases and then decreases in R when service providers’ investment efficiency is in the middle. We now explore the reasons for this situation. Brand owners’ profit function can be expressed as ΠBcs=Rqcs2, and we know that dqcs/dR<0. Thus, the increase in R increases brand owners’ profit ratio and reduces order quantity. Thus, when γs is small, the order quantity is large. The increase in R can dramatically reduce order quantity, which plays a dominant role in the profit function of brand owners. Thus, ΠBcs decreases in R. By contrast, when γs is large, the order quantity is relatively small. The increase in R slightly reduces the order quantity, and the main impact on profit function is the sharing R. Thus, ΠBcs increases in R.The above results reveal that, when brand owners cooperate with a highly efficient service provider, they should distribute profit to service providers as much as possible within a feasible extent. Doing so will not lead to a decline in the profit of brand owners but will help improve their profit. The reason is that service providers will make more effort to enlarge the market scale when they are motivated by high-profit distribution. Thus, the profit obtained by brand owners is far greater than those allocated to service providers. However, we do not recommend adopting the above strategies when brand owners cannot find efficient service providers but can only choose moderately efficient service providers. As the profit of brand owners increases first and then decreases with the increase of profit distribution ratioR, the optimal strategy is to choose an appropriate profit distribution ratio to maximize their profit.Proposition 3.
In the single e-commerce channel with collaborative operation mode, there are:(1)
whenaR¯/2m<γs≤R¯γb, there is,Ics≥Ias,qcs≥qas; otherwise, there isIcs<Ias,qcs<qas;(2)
whenaR¯/2m<γs≤γ˜cs, there isΠsccs≥Πscas; otherwise, there isΠsccs<Πscas;(3)
for anyaR¯/2m<γs<γb, there isΠScs>0.Proposition3 (1) shows that, if service providers’ investment efficiency is higher than that of brand owners’ (i.e., aR¯/2m<γs≤R¯γb), then service providers will invest more than brand owners to reduce selling cost, and brand owners will set higher order quantity in the collaborative operation mode; otherwise, service providers will invest less and brand owners will set a lower quantity. This result comes from the monotonicity of Ics on γs. Proposition 3 (2) indicates that, if service providers’ investment is effective, then, the total profit in the collaborative operation mode is more than that in the autonomous operation mode. Otherwise, the total profit in the collaborative operation mode is less. This result comes from the monotonicity of Πsccs on γs. Proposition 3 (3) shows that service providers will consistently obtain positive profit when brand owners use the collaborative operation mode.Proposition3 shows that, when the investment efficiency of service providers is high, they will be profitable, and the profit of the whole supply chain will be higher than that when brand owners adopt autonomous operation in direct online selling. Thus, the Tmall platform, which is engaged in e-commerce business under Alibaba, will spare no effort to cultivate high-quality service providers, such as actively helping e-commerce service providers to improve their service capabilities through training, professional counseling, selection of gold partners, and organizing experience sharing meetings.Proposition 4.
(1)
Consider the scenarioa/2m<γb<a2/2m2.(a)
Caseγs≤γ^1cs. When R∈Rlowcs,R^cs, ΠBcs≥ΠBas; when R∈R^cs,1, ΠBcs<ΠBas.(b)
Caseγ^1cs<γs<γb. For any R∈Rlowcs,1, ΠBcs<ΠBas.(2)
Consider the scenarioγb≥a2/2m2.(a)
Caseγs≤γ^cs. When R∈Rlowcs,R^cs, ΠBcs≥ΠBas; when R∈R^cs,1, ΠBcs<ΠBas;(b)
Caseγ^cs<γs<γ^2cs. When R∈Rlowcs,R˜cs, ΠBcs<ΠBas; when R∈R˜cs,R^cs, ΠBcs≥ΠBas; when R∈R^cs,1, ΠBcs<ΠBas.(c)
Caseγ^2cs≤γs<γb. For any R∈Rlowcs,1, ΠBcs<ΠBas.The results in Proposition2 illustrate the changing rules of ΠBcs on R in three kinds of cases of γs. Moreover, ΠBas depends on γb. Thus, the investment efficiency of brand owners γb, the efficiency of service providers γs, and the sharing ratio R influence brand owners’ preference of online operation. On the one hand, Proposition 4 states when brand owners should choose the collaborative operation mode in direct online selling. First, no matter how inefficient brand owners’ investment is, as long as their service providers’ investment efficiency is relatively effective, if brand owners use relatively small sharing R, then brand owners can benefit from adopting the collaborative operation mode. Second, when the investment efficiency of service providers is medium, brand owners’ efficiency is low, and the sharing R is in the middle, the brand owners should choose the collaborative operation mode. On the other hand, Proposition 4 states that brand owners should choose to operate by themselves when their service providers’ investment efficiency is relatively low; or when the service providers’ efficiency is relatively effective, but the sharing R is high; or when the service providers’ efficiency is medium, the brand owners’ efficiency is low, and the sharing R is large or small. According to the above analysis, when the investment efficiency of service providers is low, brand owners should not use the collaborative operation mode in all cases. If service providers’ investment efficiency is relatively high and the suitable profit distribution ratio R can be reached with service providers through negotiation, the collaborative operation is a better choice than the autonomous operation for brand owners.We consider two scenarios in Figure2 (where a=100, m=20) for a detailed illustration of Proposition 4. We analyze the strategic choice of brand owners from the perspective of investment efficiencies and sharing ratio. Region A represents when brand owners should choose the collaborative operation mode, and Region B represents when brand owners should choose the autonomous operation mode. Figure 2 shows that the threshold R^cs decreases on γs. Thus, when service providers are relatively efficient, brand owners can require the relatively high sharing of the total profit in the collaborative operation mode, whereas service providers are relatively inefficient and only require relatively low sharing. Therefore, for brand owners, selecting high-quality service providers is a key problem that they must pay attention to, and determining whether potential service providers meet their requirements through careful observation and multiple negotiations is necessary. For example, Midea Company, a well-known home appliance manufacturer in China, had many meetings with its senior managers to understand the operational efficiency and capability of Shangbai e-commerce before making it the company’s service provider (https://www.cmcc-dut.cn/).Figure 2
Mode preference of the brand owner under differentγs and R. (a) Scenario γb=5. (b) Scenario γb=15.
(a)(b)Proposition 5.
(1)
Consider the scenarioR≤a−m2/a2,ΠBcs<ΠBas.(2)
Consider the scenarioa−m2/a2<R<a−m/a.(a)
Casea/2m<γb≤γ˙cs. For any γs∈aR¯/2m,γb, ΠBcs≤ΠBas.(b)
Caseγb>γ˙cs. When γs∈aR¯/2m,γ¯cs, ΠBcs≥ΠBas; when γs∈γ¯cs,γb, ΠBcs<ΠBas.(3)
Consider the scenarioa−m/a<R<1. Whenγs∈aR¯/2m,γ¯cs, ΠBcs≥ΠBas; whenγs∈γ¯cs,γb, ΠBcs<ΠBas.Proposition5 also analyzes the problem of when brand owners should choose the collaborative operation mode. In contrast to Proposition 4, we consider three scenarios of the sharing ratio R. Brand owners should choose collaborative operation in two cases: (1) the sharing R is in the middle, brand owners’ investment is inefficient, and service providers’ investment is efficient; (2) the sharing R is large, and service providers’ investment is efficient. Brand owners should choose to operate by themselves in four cases: (1) the sharing R is small; (2) the sharing R is large, and the investment efficiency of service providers is relatively low; (3) the sharing R is middle, and the efficiency of brand owners is high; (4) the sharing R is middle, and the efficiencies of brand owners and service providers are all relatively low.The above discussion shows that the choice of autonomous operation or collaborative operation is clear in most situations. However, in the following two cases, the choice of operation mode by brand owners depends on the investment efficiency of service providers. First, when a medium profit sharing is allocated by brand owners to service providers and the investment efficiency of brand owners is low, if the efficiency of service providers is high then brand owners will benefit more when they choose the collaborative operation mode, but if the efficiency of service providers is low then brand owners should choose the autonomous operation mode. Moreover, if a relatively high profit sharing is allocated by brand owners to service providers, the brand owners’ choice of operation mode is similar to the above situation. Thus, it will not be described again.Figure3 (where a=100, m=20) presents a detailed illustration of Proposition 5, where Region A stands for the region where brand owners should choose the collaborative operation, and Region B stands for the region where brand owners should operate by themselves. The γ¯cs increases on γb, which implies that efficient brand owners must choose equally efficient service providers before choosing profit sharing.Figure 3
Mode preference of the brand owner under differentγb and γs. (a) Scenario R = 0.7. (b) Scenario R = 0.9.
(a)(b)


## 4. Dual Channels Scenario

A growing number of traditional brand owners with offline channels are carrying out online businesses to improve their sales scale. This section considers the operation mode choice problem of brand owners in a dual-channel distribution system, where brand owners directly sell products to the end consumers through the online channel and indirectly sell products through the offline channel. The brand owners chose the operation mode between autonomous operation mode and collaborative operation mode in the direct online selling.


### 4.1. Model Description and Autonomous Operation Mode

In the dual-channel scenario as shown in Figure4, customer demand in the final market is assumed to be captured by inverse demand functions, namely PR=a−qR−qB and PB=a−qB−qR, where PR and PB denote the final prices, and qR and qB are the quantities in the offline and online channels, respectively. We also assume that the unit production cost of brand owners is zero. Following Berger et al. [33], we assume that brand owners and retailers negotiate the wholesale price w in advance; that is, the wholesale price is exogenous [34–36]. To ensure that the results in the following are meaningful, we suppose 2a−4m−w>0, a−4m+w>0.Figure 4
The dual-channel distribution system.
(a)(b)We now consider the scenario when brand owners chose the autonomous operation mode in the direct channel. Brand owners first decide the investment. They then decide the online quantity, and retailers simultaneously decide the offline order quantity. We use the superscript ‘ad’ to denote the autonomous operation mode in a dual channel. We obtain the profit functions of the offline retailers and the brand owners as(3)ΠRad=a−qR−qB−wqR,(4)ΠBad=a−qB−qR−m1−IqB+wqR−γbmI22.Solving the first-order conditions of (3) and (4), we obtain the equilibrium quantities qRad=a+m1−I−2w/3 and qBad=a+w−2m1−I/3. The brand owners determine its optimal investment level using the following profit functions: ΠBad=a−qBad−qRad−m1−IqBad+wqRad−γbmI2/2. Thus, the optimal investment level is Iad=4a+w−8m/m9γb−8. In this case, to eliminate trivial cases Iad=1, we suppose γb>4a+w/9m. The optimal order quantities and profit are as follows:(5)qRad=3γba+m−2w−4a−5w9γb−8,qBad=3γba−2m+w−2w9γb−8,ΠRad=3γba−2m+w−2w9γb−82,ΠBad=2γba2−4am+5aw+4m2−mw−5w2−w8a−9w29γb−8.


### 4.2. When to Choose the Collaborative Operation Mode in the Direct Online Selling

When brand owners cooperate their e-commerce operation with service providers, service providers decide the investment level. Similar to the previous section, we consider the selling profit-sharing scheme. Thus, the profit function of brand owners and offline retailers are as follows:(6)ΠBcd=Ra−qB−qR−m1−IqB+wqR,(7)ΠRcd=a−qR−qB−wqR,where the ‘cd’ denotes the scenario when the brand owner chose collaborative operation mode in the direct online selling channel. After solving the first-order conditions in (6) and (7), the optimal order quantities in the collaborative operation mode have the same expression with that in the autonomous operation mode (i.e., qRcd=qRad, qBcd=qBad). Then, service providers determine the investment level by maximizing the profit function:(8)ΠScd=R¯a−qBcd−qRcd−m1−IqBcd−γsmI22.The optimal investment level isIcd=4R¯a−2m+w/m9γs−8R¯. To eliminate the trivial cases Icd=1, we suppose γs>4a+wR¯/9m, which equals to R>Rlowcd, where Rlowcd=1−9mγs/4a+w.The equilibrium order quantities are:qRcd=3γsa+m−2w−4R¯a−w/9γs−8R¯, qBcd=3γsa−2m+w/9γs−8R¯, The profit of three players is(9)ΠRcd=3γsa+m−2w−4R¯a−w9γs−8R¯2,ΠBcd=9Ra−2m+w2+3wa+m−2wγs2−12R¯w5a+2m−7wγs+32R¯2a−ww9γs−8R¯2,ΠScd=a−2m+w2R¯γs9γs−8R¯.Proposition 6.
In the dual-channel scenario where the brand owner chose collaborative operation mode in the direct online selling channel, there are:(1)
dIcd/dγs<0, dqBcd/dγs<0, dqRcd/dγs>0, dΠRcd/dγs>0, dΠScd/dγs<0;(2)
dIcd/dR<0, dqBcd/dR<0, dqRcd/dR>0, dΠRcd/dR>0, dΠScd/dR<0;(3)
dIcd/dw>0, dqBcd/dw<0, dqRcd/dw<0, dΠRcd/dw<0, dΠScd/dw>0.Similar to the results in Proposition1, Proposition 6 shows that, in the dual channel, the high efficiency of service providers leads to a high investment level, brand owners’ high selling quantity, and service provider’s high profit. Offline retailers compete with brand owners in the market. Thus, the order quantity and profit of offline retailers decrease in the efficiency of service providers. Similarly, the sharing proportion of brand owners negatively affects the optimal investment level, the order quantity, and service providers’ profit. However, it positively affects the order quantity and profit of offline retailers.Proposition 7.
In the dual-channel scenario where the brand owner chose collaborative operation mode in the direct online selling channel, there are,dΠBcd/dγs<0 and(1)
whenγs≤γˇcd, for any R∈Rlowcd,1, dΠBcd/dR<0;(2)
whenγˇcd<γs<γ^cd: when R∈Rlowcd,R⟶cd, dΠBcd/dR>0, when R∈R⟶cd,1, dΠBcd/dR<0;(3)
whenγ^cd≤γs<γb, for any R∈Rlowcd,1, dΠBcd/dR>0.Proposition7 illustrates the changing rule of the profit function of brand owners on the basis of the investment coefficient γs and sharing R. In the analysis, we only consider the feasible region R∈Rlowcd,1. Similar to Proposition 2, brand owners’ profit increases with service providers’ investment efficiency. Proposition 7 shows that, when the investment efficiency of service providers is high (low), brand owners’ profit decreases (increases) in R. When the investment efficiency of service providers is in the middle, brand owners’ profit first increases and then decreases in R. These changing rules are similar to that in the single-channel scenario. This finding may result from the negative effect of the sharing proportion on brand owners’ quantity and the positive effect on the order quantity of offline retailers. The profit function of brand owners can be expressed as ΠBcd=RqBcd2+wqRcd and dqRcd/dR=−1/2dqBcd/dR>0. The high value of R increases the profit ratio of brand owners and the offline order quantity while reducing the online order quantity. Therefore, when γs is small, brand owners’ quantity qBcd is relatively large. The increase in R may dramatically reduce brand owners’ quantity qBcd. Thus, the increased value of the offline order quantity qR and sharing R could not completely offset the declining value of the online order quantity. Subsequently, ΠBcd decreases in R. However, if γs is large, the online order quantity will be relatively small, and the increase in R will slightly reduce online order quantity. The main impact on profit function is the offline order quantity qR plus the sharing R. Thus, ΠBcs increases in R.Proposition 8.
In dual-channel scenario, comparing the collaborative operation with the autonomous operation mode in the direct online selling channel, when4a+wR¯/9m<γs≤γ¯cd, there are Icd≥Iad, qRcd≤qRad, ΠRcd≤ΠRad, qBcd≥qBad; otherwise, there are Icd<Iad, qRcd>qRad, ΠRcd>ΠRad, qBcd<qBad.Proposition8 indicates that, if the investment efficiency of service providers is pronounced, the investment level of service providers will be higher than that of brand owners. The online order quantity of the collaborative operation with profit sharing will be more than the autonomous operation scenario. Proposition 8 shows that, if the investment efficiency of the service providers is only slightly higher than the brand owners (i.e., γ¯cd<γs<γb), the offline retailers’ profit in the collaborative operation mode will be more than that in the autonomous operation mode. This claim is different from the results in Yoon [20], where retailers will not benefit from effective investment efficiency. The main reason is that investment only reduces the online marketing cost and makes brand owners more efficient in the retail market. These rules come from the monotonicity of Icd, qBcd, qRcd, ΠRcd on γs, which is shown in Proposition 6.In Figure5 (where a=100, m=20, w=40), with a certain numerical study, we investigate under what circumstances brand owners will adopt the collaborative operation mode and operate by themselves. The threshold R^cd is the point R satisfying ΠBcd=ΠBad. Brand owners should choose the collaborative operation mode in Region A and choose the autonomous operation mode in Region B. Figure 5 shows that the threshold R^cd decreases on γs. Thus, brand owners can require high sharing once service providers have high investment efficiency.Surprisingly, the area of Region A in Figure5 is quite larger than that in Figure 2, which means that, in the dual-channel situation, brand owners have more motivation to adopt collaborative operation instead of autonomous operation. The reason is that, under the dual-channel situation, online business is only a part of the revenue source of brand owners, and offline channels with a relatively stable business share the operating pressure of brand owners to a certain extent. Thus, brand owners are daring to outsource online business to service providers and set a high-profit distribution ratio to enhance their sales profit. In contrast, under the single-channel situation, brand owners can only sell their products through online channels. Given that the investment efficiency of service providers are the same, great business pressure makes brand owners choose the autonomous operation instead of the collaborative operation, and the profit distribution ratio is lower than that of the dual-channel situation.Figure 5
Mode preference of the brand owner under differentγs and R in dual channel. (a) Scenario γb=5. (b) Scenario γb=1.
(a)(b)Proposition 9.
In dual-channel scenario, comparing the collaborative operation with the autonomous operation mode, whenRlowcd<R≤R¯cd, there are Icd≥Iad, qRcd≤qRad, ΠRcd≤ΠRad, qBcd≥qBad; otherwise, there are Icd<Iad, qRcd>qRad, ΠRcd>ΠRad, qBcd<qBad.Proposition9 explains the change in the investment level and order quantity on the sharing R. When R is small, service providers obtain a high sharing of the total profit. Moreover, the investment level of service providers and the online order quantity are greater than that of the autonomous operation scenario, and the offline order quantity and the profit of retailers are less than the autonomous operation mode. These rules come from the monotonicity of Icd, qBcd, qRcd, ΠRcd on R, which is shown in Proposition 6.Figure6 (where a=100, m=20, and w=40) discusses the choice of the autonomous operation or the collaborative operation of brand owners under two different sharing R, where Region A stands for the region where brand owners should choose the collaborative operation, and Region B stands for the region where brand owners should operate by themselves. The threshold γ¯cd is the point γs satisfying ΠBcd=ΠBad. The γ¯cd increases on γb, which means that inefficient brand owners can choose a slightly inefficient service than efficient brand owners.Comparing Figure2 with Figure 6, brand owners are more inclined to choose the collaborative operation and accept service providers with low investment efficiency under the dual-channel situation. The reason is that, under the dual-channel situation, offline channels provide some stable profit for brand owners, and brand owners must put some investment to maintain online channels. Thus, even if the efficiency of service providers is relatively low, brand owners are willing to cooperate with them as long as they can bring profit.Figure 6
Mode preference of the brand owner under differentγb and γs in dual channel. (a) Scenario R = 0.7. (b) Scenario R = 0.9.
(a)(b)


## 4.1. Model Description and Autonomous Operation Mode

In the dual-channel scenario as shown in Figure4, customer demand in the final market is assumed to be captured by inverse demand functions, namely PR=a−qR−qB and PB=a−qB−qR, where PR and PB denote the final prices, and qR and qB are the quantities in the offline and online channels, respectively. We also assume that the unit production cost of brand owners is zero. Following Berger et al. [33], we assume that brand owners and retailers negotiate the wholesale price w in advance; that is, the wholesale price is exogenous [34–36]. To ensure that the results in the following are meaningful, we suppose 2a−4m−w>0, a−4m+w>0.Figure 4
The dual-channel distribution system.
(a)(b)We now consider the scenario when brand owners chose the autonomous operation mode in the direct channel. Brand owners first decide the investment. They then decide the online quantity, and retailers simultaneously decide the offline order quantity. We use the superscript ‘ad’ to denote the autonomous operation mode in a dual channel. We obtain the profit functions of the offline retailers and the brand owners as(3)ΠRad=a−qR−qB−wqR,(4)ΠBad=a−qB−qR−m1−IqB+wqR−γbmI22.Solving the first-order conditions of (3) and (4), we obtain the equilibrium quantities qRad=a+m1−I−2w/3 and qBad=a+w−2m1−I/3. The brand owners determine its optimal investment level using the following profit functions: ΠBad=a−qBad−qRad−m1−IqBad+wqRad−γbmI2/2. Thus, the optimal investment level is Iad=4a+w−8m/m9γb−8. In this case, to eliminate trivial cases Iad=1, we suppose γb>4a+w/9m. The optimal order quantities and profit are as follows:(5)qRad=3γba+m−2w−4a−5w9γb−8,qBad=3γba−2m+w−2w9γb−8,ΠRad=3γba−2m+w−2w9γb−82,ΠBad=2γba2−4am+5aw+4m2−mw−5w2−w8a−9w29γb−8.


## 4.2. When to Choose the Collaborative Operation Mode in the Direct Online Selling

When brand owners cooperate their e-commerce operation with service providers, service providers decide the investment level. Similar to the previous section, we consider the selling profit-sharing scheme. Thus, the profit function of brand owners and offline retailers are as follows:(6)ΠBcd=Ra−qB−qR−m1−IqB+wqR,(7)ΠRcd=a−qR−qB−wqR,where the ‘cd’ denotes the scenario when the brand owner chose collaborative operation mode in the direct online selling channel. After solving the first-order conditions in (6) and (7), the optimal order quantities in the collaborative operation mode have the same expression with that in the autonomous operation mode (i.e., qRcd=qRad, qBcd=qBad). Then, service providers determine the investment level by maximizing the profit function:(8)ΠScd=R¯a−qBcd−qRcd−m1−IqBcd−γsmI22.The optimal investment level isIcd=4R¯a−2m+w/m9γs−8R¯. To eliminate the trivial cases Icd=1, we suppose γs>4a+wR¯/9m, which equals to R>Rlowcd, where Rlowcd=1−9mγs/4a+w.The equilibrium order quantities are:qRcd=3γsa+m−2w−4R¯a−w/9γs−8R¯, qBcd=3γsa−2m+w/9γs−8R¯, The profit of three players is(9)ΠRcd=3γsa+m−2w−4R¯a−w9γs−8R¯2,ΠBcd=9Ra−2m+w2+3wa+m−2wγs2−12R¯w5a+2m−7wγs+32R¯2a−ww9γs−8R¯2,ΠScd=a−2m+w2R¯γs9γs−8R¯.Proposition 6.
In the dual-channel scenario where the brand owner chose collaborative operation mode in the direct online selling channel, there are:(1)
dIcd/dγs<0, dqBcd/dγs<0, dqRcd/dγs>0, dΠRcd/dγs>0, dΠScd/dγs<0;(2)
dIcd/dR<0, dqBcd/dR<0, dqRcd/dR>0, dΠRcd/dR>0, dΠScd/dR<0;(3)
dIcd/dw>0, dqBcd/dw<0, dqRcd/dw<0, dΠRcd/dw<0, dΠScd/dw>0.Similar to the results in Proposition1, Proposition 6 shows that, in the dual channel, the high efficiency of service providers leads to a high investment level, brand owners’ high selling quantity, and service provider’s high profit. Offline retailers compete with brand owners in the market. Thus, the order quantity and profit of offline retailers decrease in the efficiency of service providers. Similarly, the sharing proportion of brand owners negatively affects the optimal investment level, the order quantity, and service providers’ profit. However, it positively affects the order quantity and profit of offline retailers.Proposition 7.
In the dual-channel scenario where the brand owner chose collaborative operation mode in the direct online selling channel, there are,dΠBcd/dγs<0 and(1)
whenγs≤γˇcd, for any R∈Rlowcd,1, dΠBcd/dR<0;(2)
whenγˇcd<γs<γ^cd: when R∈Rlowcd,R⟶cd, dΠBcd/dR>0, when R∈R⟶cd,1, dΠBcd/dR<0;(3)
whenγ^cd≤γs<γb, for any R∈Rlowcd,1, dΠBcd/dR>0.Proposition7 illustrates the changing rule of the profit function of brand owners on the basis of the investment coefficient γs and sharing R. In the analysis, we only consider the feasible region R∈Rlowcd,1. Similar to Proposition 2, brand owners’ profit increases with service providers’ investment efficiency. Proposition 7 shows that, when the investment efficiency of service providers is high (low), brand owners’ profit decreases (increases) in R. When the investment efficiency of service providers is in the middle, brand owners’ profit first increases and then decreases in R. These changing rules are similar to that in the single-channel scenario. This finding may result from the negative effect of the sharing proportion on brand owners’ quantity and the positive effect on the order quantity of offline retailers. The profit function of brand owners can be expressed as ΠBcd=RqBcd2+wqRcd and dqRcd/dR=−1/2dqBcd/dR>0. The high value of R increases the profit ratio of brand owners and the offline order quantity while reducing the online order quantity. Therefore, when γs is small, brand owners’ quantity qBcd is relatively large. The increase in R may dramatically reduce brand owners’ quantity qBcd. Thus, the increased value of the offline order quantity qR and sharing R could not completely offset the declining value of the online order quantity. Subsequently, ΠBcd decreases in R. However, if γs is large, the online order quantity will be relatively small, and the increase in R will slightly reduce online order quantity. The main impact on profit function is the offline order quantity qR plus the sharing R. Thus, ΠBcs increases in R.Proposition 8.
In dual-channel scenario, comparing the collaborative operation with the autonomous operation mode in the direct online selling channel, when4a+wR¯/9m<γs≤γ¯cd, there are Icd≥Iad, qRcd≤qRad, ΠRcd≤ΠRad, qBcd≥qBad; otherwise, there are Icd<Iad, qRcd>qRad, ΠRcd>ΠRad, qBcd<qBad.Proposition8 indicates that, if the investment efficiency of service providers is pronounced, the investment level of service providers will be higher than that of brand owners. The online order quantity of the collaborative operation with profit sharing will be more than the autonomous operation scenario. Proposition 8 shows that, if the investment efficiency of the service providers is only slightly higher than the brand owners (i.e., γ¯cd<γs<γb), the offline retailers’ profit in the collaborative operation mode will be more than that in the autonomous operation mode. This claim is different from the results in Yoon [20], where retailers will not benefit from effective investment efficiency. The main reason is that investment only reduces the online marketing cost and makes brand owners more efficient in the retail market. These rules come from the monotonicity of Icd, qBcd, qRcd, ΠRcd on γs, which is shown in Proposition 6.In Figure5 (where a=100, m=20, w=40), with a certain numerical study, we investigate under what circumstances brand owners will adopt the collaborative operation mode and operate by themselves. The threshold R^cd is the point R satisfying ΠBcd=ΠBad. Brand owners should choose the collaborative operation mode in Region A and choose the autonomous operation mode in Region B. Figure 5 shows that the threshold R^cd decreases on γs. Thus, brand owners can require high sharing once service providers have high investment efficiency.Surprisingly, the area of Region A in Figure5 is quite larger than that in Figure 2, which means that, in the dual-channel situation, brand owners have more motivation to adopt collaborative operation instead of autonomous operation. The reason is that, under the dual-channel situation, online business is only a part of the revenue source of brand owners, and offline channels with a relatively stable business share the operating pressure of brand owners to a certain extent. Thus, brand owners are daring to outsource online business to service providers and set a high-profit distribution ratio to enhance their sales profit. In contrast, under the single-channel situation, brand owners can only sell their products through online channels. Given that the investment efficiency of service providers are the same, great business pressure makes brand owners choose the autonomous operation instead of the collaborative operation, and the profit distribution ratio is lower than that of the dual-channel situation.Figure 5
Mode preference of the brand owner under differentγs and R in dual channel. (a) Scenario γb=5. (b) Scenario γb=1.
(a)(b)Proposition 9.
In dual-channel scenario, comparing the collaborative operation with the autonomous operation mode, whenRlowcd<R≤R¯cd, there are Icd≥Iad, qRcd≤qRad, ΠRcd≤ΠRad, qBcd≥qBad; otherwise, there are Icd<Iad, qRcd>qRad, ΠRcd>ΠRad, qBcd<qBad.Proposition9 explains the change in the investment level and order quantity on the sharing R. When R is small, service providers obtain a high sharing of the total profit. Moreover, the investment level of service providers and the online order quantity are greater than that of the autonomous operation scenario, and the offline order quantity and the profit of retailers are less than the autonomous operation mode. These rules come from the monotonicity of Icd, qBcd, qRcd, ΠRcd on R, which is shown in Proposition 6.Figure6 (where a=100, m=20, and w=40) discusses the choice of the autonomous operation or the collaborative operation of brand owners under two different sharing R, where Region A stands for the region where brand owners should choose the collaborative operation, and Region B stands for the region where brand owners should operate by themselves. The threshold γ¯cd is the point γs satisfying ΠBcd=ΠBad. The γ¯cd increases on γb, which means that inefficient brand owners can choose a slightly inefficient service than efficient brand owners.Comparing Figure2 with Figure 6, brand owners are more inclined to choose the collaborative operation and accept service providers with low investment efficiency under the dual-channel situation. The reason is that, under the dual-channel situation, offline channels provide some stable profit for brand owners, and brand owners must put some investment to maintain online channels. Thus, even if the efficiency of service providers is relatively low, brand owners are willing to cooperate with them as long as they can bring profit.Figure 6
Mode preference of the brand owner under differentγb and γs in dual channel. (a) Scenario R = 0.7. (b) Scenario R = 0.9.
(a)(b)


## 5. Conclusion

In today’s e-commerce age, brand owners turn to cooperate with professional e-commerce service providers to operate their online business because they have professional technical advantages and data analysis and customer service capabilities. This study analyzes whether brand owners should use the collaborative or autonomous operation mode when they want to sell products through online channels with a selling cost. In the autonomous operation mode, brand owners decide an investment level to reduce selling cost and bear the investment cost. In the collaborative operation mode, brand owners share a certain amount of the selling profit with service providers, and service providers decide an investment level and bear the investment cost. In this study, we investigate two channel scenarios, namely the single e-commerce channel scenario, where brand owners only sell online products, and the dual channels scenario, where brand owners simultaneously carry out their offline and online business.Our analysis suggests that collaborative operation in online selling is an efficient format, but, whether brand owners should use it depends on the selling profit sharing ratio between brand owners and service providers and the investment efficiency of brand owners and service providers. Specifically, brand owners should choose collaborative operation under two circumstances: first, when the investment efficiency of service providers is much higher than that of brand owners and the sharing ratio of service providers is relatively high; second, when the investment efficiency of service providers is medium and brand owners’ efficiency is low, brand owners and service providers achieve a medium selling profit sharing ratio. Based on the analysis, in the collaborative operation mode, brand owners are willing to transfer a large part of the selling profit ratio to high-efficiency service providers to encourage them to strive to expand the market scale and increase the profit of brand owners and even the whole supply chain. This phenomenon occurs in many famous e-commerce platforms. For example, Tmall exerts all energy to cultivate high-level service providers. The service providers in Tmall always have a high profit-sharing ratio, and their high-efficiency support brand owners to win the market.Moreover, when the investment effect on product price increases, the difference of products will increase, and consumers will be more willing to pay for the premium of such difference. Therefore, creating differentiated products is a feasible solution for brand owners to increase profit. Furthermore, compared with brand owners who have only one online channel, dual-channel brand owners have a greater incentive to use the collaborative operation than the autonomous operation. The reason is that great commercial pressure forces the former to use autonomous operation, whereas the latter with stable offline channels have more motivation to cooperate with service providers and even accept some service providers with slightly lower investment efficiency.We present possible directions for future research. First, in the current mode, we assume that the products are homogeneous between online and offline channels. Future research can consider heterogeneous scenarios. Second, in the current mode, the sharing ratio of service providers and brand owners is exogenous. In practice, this ratio is negotiated in the supply chain. Thus, the decision on the sharing ratio is worth considering [37–42].



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*Source: 3543368-2022-07-11.xml*