Optimality of network marketing integrated in a dual-channel distribution system

This paper provides a framework to study the integration of network marketing in a dual channel distribution system. We develop an approach to optimize the main decision variables of this system simultaneously. These decision variables include the price paid by the customers of both channels, confidence level, the effort level of active distributors of network marketing and also whole sale price. Although both channels compete, it is vital to have a balanced pricing system to make both channels motivated. However, the price in network marketing and traditional retailer system is not necessarily equal, due to the difference of their nature. Furthermore, it is also required to develop an appropriate system of commissioning for the payoff of distributers at different levels of network marketing to make them motivated. We also examine different scenarios of dual distribution systems, centralized and decentralized operation of network marketing. Furthermore, in case of decentralized system, we also investigate revenue or profit sharing for all parties involved (manufacturer; retailer and network marking distributers). To illustrate the proposed approach, we present some numerical studies and also investigate the impact of customer loyalty degree to retail channel on decisions.