TECHNOLOGY FOR CHANGE

Research: Direct Sales Mean Lower Cost, Less Choice

Stan Gibson | Date: 11-05-09 | Comments

Lower prices equal less variety � that�s what happens in online sales when manufacturers sell directly to consumers, according to a University of Illinois business professor.

Lower prices equals less variety � that�s what happens in online sales when manufacturers sell directly to consumers, according to a University of Illinois business professor. Yunchuan �Frank� Liu, assistant professor of business administration, conducted research based on game theory to uncover his findings, which run counter to earlier research.

Eliminating the retailer�s price markup apparently curbs the manufacturer�s incentive to provide an extensive product line, yielding fewer choices for consumers, Liu contends. In using game theory, Liu pitted the competing interests of manufacturers and retailers in achieving profit. The consumer, meanwhile, decides whether to buy and which product to buy.

Liu pointed to the limited cosmetic varieties provided by direct-seller Avon in contrast to Estee Lauder, which markets a vast line of in-store products that offer sometimes subtle differences to match buyers' individual tastes.

"Over the next few decades, we could see a revolutionary change in the retail marketplace, with less variety in certain product areas, from cosmetics to computer equipment to cars," Liu said. "So consumers may be less likely to find products that most fit their needs."

Liu cited apparently contradictory 1998 University of California at Berkeley research that showed manufacturers providing longer product lines when selling directly over the Internet. He said those results were valid under certain conditions such as in a growing industry in which consumers have not yet bought products. A mature industry, he contents, would produce different results.
Product customization may tend to create more consumer choices in direct sales if the customization technology is available, he said. However, customization of a single product is not the same as a long product line, he said.