Analysis of Supplier's Market Entry Decision with Traffic Congestion Cost

In recent years, it is increasingly common for suppliers to open a direct channel and sell products directly to consumers. While direct channel management has been studied thoroughly in the literature, the effect of traffic congestion is often ignored. This paper considers consumer's sensitivity to traffic congestion as a key variable and sets up a model to investigate supplier's decision on whether to open a direct channel to enter the downstream market. We show that the supplier is better off by opening a direct channel if consumers are not very sensitive to traffic congestion, but traffic congestion indeed reduces the supplier's incentive of opening a direct channel. We also analyze how the demands and profits of the supplier and retailer change with consumers' sensitivity to traffic congestion.