Abstract: With the increasing development of the Internet, more and more manufacturers have introduced online channels to sell the same products through traditional retail channels and online channels. However, such dual-channel strategy of manufacturers creates inventory competition among the channels. Meanwhile, there is a mutual substitution problem between traditional retail channels and online channels. That is, when one of the channels is out of stock, a certain percentage of customers will switch to another channel to purchase products. This leads to free riding problem in the dual channel supply chain system, that is consumers and manufacturers with online channels hitch a ride with offline retailers. However, the existing literatures only focuse on the problem of stock-out-based consumer switching or free riding behavior. Few literatures studied both the impact of free-riding behavior and stock-out consumer switching behavior between channels on the decision-making of each subject in the supply chain. In this problem background, two questions are studied:how stock-out-based consumer switching behavior affects the dual-channel inventory strategy, and how the free riding behavior of manufacturers affects the dual-channel inventory strategy and promotion efforts of retailer. To answer these two questions, a dual-channel supply chain model consisting of a manufacturer and a retailer is established in this paper. First the dual-channel supply chain model is analyzed in a decentralized decision-making setting with general stochastic demand, and discuss the effect of the free riding behavior and stock-out-based consumer switching behavior on inventory strategies. Then inventory strategies and promotion strategies are considered when the demand in each channel follows a uniform distribution. Finally, the inventory strategy and promotion strategy in centralized decision-making setting are analyzed for comparison. The results show that the higher the substitution rate of the online channel, the higher the retailer's optimal order. Meanwhile, the larger the substitution rate of retail channels, the more inventory of the manufacturer will be provided for the online channel. However, the impact of free riding behaviors on the retailers and the manufacturers depends on the magnitude of substitution rate between channels, but free riding can reduce the promotional efforts from the retailers. Our research can enrich existing dual-channel supply chain literature and provide decision support for dual-channel supply chain manufacturers and retailers.

Key words: dual-channel supply chain, free riding behavior, inventory competition, promotion effort