Electronic Commerce Research and Applications 35 (2019) 100853

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Electronic Commerce Research and Applications

journal homepage: www.elsevier.com/locate/elerap

Procurement strategies of E-retailers under different logistics distributions T

with quality- and service-dependent demand
Man Xua, Wansheng Tanga, , Chi Zhoub
⁎

a
College of Management and Economics, Tianjin University, Tianjin 300072, China
b
School of Management, Tianjin University of Technology, Tianjin 300384, China

ARTICLE INFO ABSTRACT

Keywords: This paper develops game-theoretic models to study a procurement strategy problem faced by an e-retailer
Product and service supply chain selling products online under different logistics distribution systems. The e-retailer can purchase products di-
Procurement strategy rectly from a manufacturer under its own brand or indirectly from a brand-name company and then deliver the
Third-party logistics products to consumers through logistics services. By comparing and analysing e-retailers’ procurement equili-
Product quality
brium strategies under different logistics, we find that e-retailers with different logistics systems have identical
Logistics service level
procurement preferences when the procurement cost is low or high. However, when the procurement cost is
moderate, the e-retailer with third-party logistics is more motivated to adopt direct procurement. In addition,
when indirect procurement has a smaller market influence, e-retailers are more inclined toward direct pro-
curement even if the demand is more sensitive to brand-name products. Furthermore, under certain conditions,
pricing rules are quite opposite between different procurement modes such that the price decreases even if the
cost is more sensitive to the logistics service level in indirect procurement. Moreover, the brand-name company
may set a lower resale price instead when improving quality becomes more expensive.

1. Introduction sources of customer dissatisfaction can arise due to logistics, such as

With the e-commerce boom, e-retailers have adopted a variety of
procurement strategies for the sale of products in an attempt to deliver
the highest possible value to end consumers. When an e-retailer pur-
chases products from a manufacturer, the intermediate costs and brand
premium are greatly reduced, which allows the e-retailer to set a lower
price to attract more consumers. However, purchasing products from a
brand-name company reduces consumers’ risk perceptions when
shopping online and satisfies their flaunting mentality. For instance,
JD.com, a large e-retailer in China, has cooperated with Armani, Casio,
Swarovski and many other brand-name flagship stores to purchase and
resell their products to consumers. By contrast, in addition to co-
operating with brand-name companies, NetEase sells similar products
under its own brand, “YanXuan”, that it purchases directly from ori-
ginal manufacturers that also supply to top international brands, such
as Gucci, Burberry and UGG. With YanXuan’s portfolio now covering
10,000 products, Ding, the founder and CEO of NetEase, expects to
make more than $3 billion from the site in 2018.
Unlike brick-and-mortar stores, where the consumer has the option
of taking the product himself, most transactions over the Internet rely
on the use of a logistics channel for product delivery. Significant
late arrival (or non-arrival) of the product, inaccuracy of the order,
and/or damaged or replaced products. As a result, retail businesses
have recently begun to regard logistics as a primary source of “sus-
tainable competitive advantage” (Sandberg, 2013; Renko and Ficko,
2010). Some e-retailers, such as JD.com, Amazon and SunNing, have
their own logistics systems; by contrast, NetEase and Taobao.com co-
operate with third-party logistics providers, such as SF-express and
ZTO. Self-established logistics enable downstream integration by e-re-
tailers, which can improve supply chain efficiency and reduce product
damage due to transportation while increasing related costs. Although
third-party logistics providers are more professional and possess more
extensive logistics networks to cover consumers, e-retailers are unable
to control the service during the transportation process.
The key to influencing consumer network shopping is to improve
consumers’ shopping experience, and different products and delivery
methods result in different shopping experiences for consumers. The
upstream procurement mode is related to the quality or value of the
product, while the downstream logistics ensure the authenticity and
integrity of the product. Thus, for e-retailers, the two links are inter-
related and influential. To explore the upstream procurement pre-
ference of e-retailers in combination with the characteristics of e-

⁎
Corresponding author.
E-mail addresses: xuman@tju.edu.cn (M. Xu), tang@tju.edu.cn (W. Tang), czhou@tjut.edu.cn (C. Zhou).

https://doi.org/10.1016/j.elerap.2019.100853
Received 12 December 2018; Received in revised form 21 April 2019; Accepted 22 April 2019
Available online 27 April 2019
1567-4223/ © 2019 Elsevier B.V. All rights reserved.
M. Xu, et al.
commerce, this paper considers the procurement strategy problem of e-
retailers under different logistics modes. To this end, our aim is to in-
vestigate the following questions: (i) Under what conditions does an e-
retailer prefer to cooperate directly with manufacturers to sell their
own-brand goods? In addition, under what conditions is an e-retailer
willing to cooperate with a brand-name company? (ii) How do different
logistics modes affect e-retailers’ procurement preferences?.
To investigate these questions, we study a supply chain consisting of
a manufacturer, a brand-name company, an e-retailer, and a third-party
logistics service provider. The e-retailer can purchase products that will
carry its own label directly from a manufacturer (direct procurement)
or wholesale brand products from the brand-name company (indirect
procurement). Two types of e-retailers are discussed: one with self-built
logistics and one with third-party logistics. Moreover, to depict the
heterogeneity of consumers’ preferences for products from different
procurement channels and logistics service modes, we assume that the
demand sensitivities for each procurement and logistics mode are dif-
ferent. In addition, to characterize the influences of the brand-name
company and the cost advantage of the third-party logistics service
provider, we assume that the e-retailer’s relevant costs (procurement
cost and logistics service cost) are higher than those of the brand-name
company and third-party logistics service provider. Based on these
settings, we derive the equilibrium procurement strategies for the e-
retailer under self-built logistics and third-party logistics and analyse
the impact of the logistics mode on the procurement preference.
One might intuitively expect that the market advantage of brand-
name companies is obvious, in other words, a high brand premium and
procurement cost advantage, which makes the e-retailer willing to co-
operate with the brand-name company to expand market and increase
profit. Our result illustrates that, surprisingly, direct procurement is
favoured by both self-built logistics and third-party logistics e-retailers
if their procurement costs are low. This preference occurs because when
cooperating with manufacturers, the e-retailer can reduce the cost of
intermediate circulation and lower the price to increase demand on the
one hand; on the other hand, the e-retailer can control product quality
from the source. As the procurement cost increases, the positive effects
of these two aspects gradually weaken. Therefore, when the procure-
ment cost is high, the e-retailer prefers to cooperate with the brand-
name company. This finding is consistent with business practices, as
most products sold by e-retailers that are obtained from manufacturers
directly under their own brands are daily consumer goods. Such pro-
ducts have high substitutability, and consumers are often more con-
cerned with cost performance. However, for goods with high pur-
chasing costs, such as jewellery and commodities, e-retailers are more
willing to cooperate with brand-name companies.
In addition to the impact of procurement costs, the attitudes of e-
retailers with different logistics systems on procurement preferences
have obvious differences. We find that under the same conditions, the e-
retailer with third-party logistics is more willing to cooperate directly
with the manufacturer to sell own-brand goods. In other words, com-
pared with traditional retail, downstream logistics has a key influence
on the e-retailer’s upstream procurement integration. For example,
YanXuan, as NetEase’s own brand, is among the first batch of self-
owned brands created by e-retailers. NetEase cannot control the logis-
tics service directly with third-party logistics, and therefore, controlling
product quality from the procurement source and reducing the brand
premium to improve the customers’ shopping experience are key.
However, JD.com can use its own logistics to improve the consumers’
shopping experience without an urgent need to develop its own brand.
Analysing the outcomes between direct and indirect procurement, we
find that different procurement modes have different pricing rules. Under
direct procurement, as intuitively expected, the e-retailer will raise the
price if the demand’s sensitivity to the logistics service level is high and
decrease the price if the cost sensitivity to the logistics service level is high.
However, the pricing rules will be totally opposite when the market is not
sensitive to logistics service under indirect procurement. The underlying
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Electronic Commerce Research and Applications 35 (2019) 100853
intuition of this finding is the interaction between the cost and benefit of
improving logistics service. When demand is less sensitive to the logistics
service level, as the demand’s sensitivity to logistics service increases,
improving the logistics service level results in a higher cost but increases
demand only by a small amount, and thus, the e-retailer would prefer to
raise prices to ensure a certain profit.
Another striking result is that the brand-name company even re-
duces wholesale prices when the cost sensitivity to quality increases.
The reason for this phenomenon is that the increased cost discourages
the brand-name company from improving quality. However, to ensure a
certain demand, setting a lower wholesale price gives the e-retailer
more incentive to increase logistics service to stimulate consumption.
Finally, to further characterize the differences between the two pro-
curement modes, we discuss the case with the existence of brand pre-
mium and find that the higher the brand premium, the more willing the
e-retailer is to cooperate with the brand-name company even though it
will face a higher wholesale price.
The remainder of this paper is organized as follows. Section 2 re-
views the relevant literature. After introducing our problem in Section
3, we discuss the procurement strategies of e-retailer under self-built
logistics and third-party logistics in Sections 4 and 5. Section 6 discusses
the impacts of logistics modes and the characteristics of different pro-
curement modes. Section 7 presents a numerical study to further verify
the results. An extension is proposed in Section 8 to explore the impact
of brand premium. Finally, we conclude the article in Section 9.
2. Literature review and discussion
Our work is primarily related to three streams of research: pro-
curement strategies, logistics service operation modes, and quality- and
service-dependent demand. Next, we review each of these areas and
discuss their relevance and differences with respect to our research.
2.1. Literature review
2.1.1. Procurement strategies
Procurement is an essential component of supply chain management
and has been extensively studied for many years (Hult and Chabowski,
2008; Terpend et al., 2008; Pagano, 2009; Giunipero et al., 2018; Ateş et al.,
2018). Giunipero et al. (2018) provide a literature review on the topic of
procurement in the past 30 years and divide the research into seven major
categories, of which more than half discuss strategic and transactional/
tactical procurement. In terms of theoretical research, game theory and
principal-agent theory are commonly used research methodologies to study
supply chain management related to procurement strategies.
One aspect of the research is strategic procurement and inventory
management. Anand et al. (2008) study a dynamic procurement pro-
blem between an upstream firm and a downstream firm in a two-period
scenario under a deterministic demand market, in which the upstream
firm is uncapacitated. On this basis, Keskinocak et al. (2008) compare
two types of procurement contracts: dynamic and commitment con-
tracts where the supplier’s capacity in the first period is limited. Erhun
et al. (2008) explore the effects of dynamic procurement and one-shot
procurement agreement on supply chain efficiency, where the demand
is sensitive to price, and find that all supply chain members benefit from
multiple trading opportunities.
In addition to adjusting inventory through dynamic procurement to
cope with market fluctuations, a majority of studies on procurement
strategy focus on the tactical: single versus multiple sourcing. Larson
and Kulchitsky (1998) indicate the benefits of single sourcing. Wagner
and Gunther (2007) consider the supplier switching decisions in a
principal-agent framework under asymmetric information and show
that a firm would like to switch single sourcing to dual sourcing when
the entrant supplier has intermediate unit costs. Burke et al. (2007)
analyse the procurement decisions of a single product under uncertain
demand and find that the procurement strategy preferences depend on
M. Xu, et al.
the supplier’s capacity. Yu et al. (2009) evaluate the impacts of supply
disruption risks on the choice between the famous single- and dual-
sourcing methods in a two-stage supply chain. Then, Wang et al. (2010)
analyse two strategies to address supply risks: dual sourcing and im-
proving supplier reliability.
All the above papers basically study the procurement decisions of
firms under a two-layer supply chain, that is, only the upper suppliers
and firms play games. However, the procurement strategy considered in
our paper is similar to the control and delegation strategy in a multi-tier
supply chain. In the electronics industry, the “control” strategy can be
seen as a direct procurement strategy in which the original equipment
manufacturer (OEM) purchases the product from the tier-1 supplier; the
“delegation” strategy can be seen as an indirect procurement strategy in
which the OEM indirectly purchases the components through tier-2
contract manufacturers.
Based on game theory and principal-agent theory, the procurement
strategy selection of OEMs is discussed from the aspects of information
asymmetry and contract design. Guo et al. (2010) consider a three-
tiered supply chain in which the OEM is assumed to be a Stackelberg
leader that determines the quantity of products, and both the CM and
the supplier have private information about their own production costs.
Wang et al. (2014) examine the impacts of the different contract for-
mats on the OEM’s delegation decision. The authors find that the OEM
always prefers control over delegation under both contracts, while the
preferences of the CM and supplier depend on the contract selection.
Kayiş et al. (2013) emphasize that if firms use simple price-only con-
tracts, then the manufacturer may achieve strictly greater expected
profit with either delegation or control. Different from the previous
articles, Lv (2018) studies the procurement strategies of two competi-
tive OEMs who outsource production to a common CM, and the results
indicate that the equilibrium outcome is affected by the CM’s pro-
curement cost distribution and the market size.
In addition to theoretical studies, some empirical studies and cases also
discuss the procurement strategies of firms. Carbone (2004) notes that HP
delegates procurement of commodity components to its contract manu-
facturers but controls the purchase of strategic components. In the retail
industry, Denend and Plambeck (2007) and Denend and Plambeck (2010)
analyse Walmart’s procurement strategy through case studies. Their re-
search shows that Walmart purchased consumer goods from first-tier
suppliers prior to 2005 and began to contract directly with lower-tier
suppliers in 2006 to obtain innovative and environmentally friendly pro-
ducts. These studies all consider the control of firms over product pro-
curement in a three-layer or multi-layer supply chain; however, they all
address the procurement of components or fixed brand products and do
not discuss the situation where a change in procurement mode is ac-
companied by a change in product brand attributes.
2.1.2. Logistics service operation modes
With the rapid development of the logistics industry, logistics pro-
blems have recently received considerable attention in both empirical
and theoretical research. Firms usually adopt two logistics modes: self-
built logistics and third-party logistics (Chen and Hua, 2013; Xiao et al.,
2012; Yu et al., 2017). Marasco (2008), Evangelista and Pietro (2018)
and Aguezzoul (2014) conduct a literature review of third-party logis-
tics and sort out the concept, cooperation model, development process,
service advantages, selection criteria and methods of third-party lo-
gistics. Aguezzoul (2014) reveals that cost is the most widely adopted
criterion, followed by relationship, services, and quality. Wang and Pan
(2012) note the advantages and disadvantages of the two types logistics
in China and provide some advice on the promotion of logistics for B2C
e-commerce in China. Song et al. (2000) explain why the use of third-
party logistics is becoming increasingly widespread from the perspec-
tive of the outsourcing company and the logistics company.
Based on the advantages and disadvantages of the two types of lo-
gistics, some literature studies the choice of logistics mode (Lim, 2000;
Chen et al., 2001; Cai et al., 2013; Wu et al., 2015; Liu et al., 2018).
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Electronic Commerce Research and Applications 35 (2019) 100853
Bolumole et al. (2007) apply multiple social science theoretical per-
spectives to develop a framework within which logistics outsourcing
decisions can be examined and evaluated. Mao and Yang (2013) study
the outsourcing and self-run business decision making in the distribu-
tion transportation of international logistics. Using game theory and
principal-agent theory, Song et al. (2008) study a shipment consolida-
tion problem faced by a third-party logistics provider whose objective is
to minimize the sum of the transportation and storage costs. Cai et al.
(2013) propose an incentive scheme to coordinate the supply chain in
which a producer supplies a fresh product through a third-party logis-
tics provider. Wu et al. (2015) develop three game models under dif-
ferent power structures and design two incentive mechanisms to co-
ordinate the decentralized channel.
In addition, some empirical and case studies evaluate the relation-
ship between service capabilities and performance. For instance, Liu
and Lyons (2011) evaluate the relationship between the service cap-
abilities and performance of UK and Taiwanese third-party logistics
providers. Cho et al. (2008) examine the impact of logistics capability
and logistics outsourcing on firm performance in an e-commerce
market environment.
2.1.3. Quality- and service-dependent demand
This paper is also related to the literature on attribute-dependent
demand. Federgruen and Heching (1999) indicates that total consumer
demand is attribute dependent; generally, demand is higher given a
lower sale price, a higher service level, or higher product quality.
One stream within this literature focuses on product quality-dependent
demand. Spence (1975), Sheshinski (1976), Mussa and Rosen (1978) in-
troduce product quality in the case of monopoly to investigate the market
equilibrium and social optimum value. Moorthy (1988) then factors pro-
duct quality into the model of duopoly competition, where two identical
firms compete on product quality and price. Different from competitive
quality, Motta (1993) regards quality as an endogenous variable and
studies the equilibrium solutions in the case of price competition and
quantity competition. Banker et al. (1998) model consumer demand as a
linear function of price and quality levels to investigate whether the
equilibrium levels of quality increase as competition intensifies. In the
two-tier supply chain game, Seifbarghy et al. (2015) consider a contract
design problem in a supply chain with price- and quality-dependent de-
mand, and their supply chain consists of a manufacturer that determines
the product quality and a retailer that sets the price. In addition, many
studies consider quality-dependent demand, (e.g., Maiti and Giri, 2017;
Chen et al., 2017; Wang et al., 2017), but they all assume that manu-
facturers determine product quality.
Another stream within this literature focuses on service-dependent
demand. Bernstein and Federgruen (2004) develop a general equili-
brium model for industries with price and service competition. Hall and
Porteus (2000) investigate service competition among multiple firms by
building a simple dynamic model. Their work is extended by Liu et al.
(2007), who relax the assumption on the service failure pattern and
develop a general demand model. Different from this literature, which
consider services in the same level supply chain, some researchers take
the service into consideration in the two-layer or even multi-layer
supply chain to build a game model between manufacturers and re-
tailers. Chen et al. (2008) discuss a game between a manufacturer and
two competing service retailers. Kurata and Nam (2010) explore the
interaction of the manufacturer’s and retailer’s after-sales services.
In addition, some literature focuses on service- and quality-depen-
dent demand. In online retail, logistics is a very important service that
directly affects the utility of consumers. Li and Lee (1994) present a
model of market competition in which customer preferences consider
not only price and quality but also delivery speed. Hou et al. (2018)
consider online retailers’ investments in delivery service, where custo-
mers diffuse among the retailers based on purchasing experience and
online reviews. Gurnani and Erkoc (2008) and Ma et al. (2013) consider
a supply chain in which demand is related simultaneously to both the
M. Xu, et al.
quality input of the manufacturer and the sales service effort of the
retailer. Ma et al. (2013) find that if the retailer does not exert sales
service effort, the manufacturer will commit much less effort to quality
improvement. Similarly, if the manufacturer does not make any com-
mitment to quality improvement effort, then the retailer will exert less
sales service effort.
2.2. Discussion
Similar to some of the literature mentioned above, we use game
theory and take cost into consideration to discuss procurement strategy;
however, relatively few studies consider the impact of the downstream
logistics mode on the upstream procurement mode in an e-commerce
environment. The following summarizes the differences between our
research and the previous literature.
First, Anand et al. (2008), Keskinocak et al. (2008), and Erhun et al.
(2008) connect the procurement plan and inventory and consider their
interactions, both of which are activities upstream of the firm. In con-
trast to considering only upstream activities, we consider that different
procurement strategies affect the purchase intention of end consumers,
thereby affecting the market demand. In addition, the influence of lo-
gistics mode on purchasing preference is introduced to further discuss
the interaction between the upstream and downstream of the supply
chain.
Second, Wagner and Gunther (2007), Burke et al. (2007), Yu et al.
(2009) and Wang et al. (2010) discuss procurement strategy selection
for the number of suppliers. By contrast, we emphasize the question of
“who” to source from; that is, different purchasing patterns mean pro-
blems of different brand products. Compared with the traditional pro-
blem of “control and delegation”, such as Guo et al. (2010), Wang et al.
(2014), and Kayiş et al. (2013), the final product considered in this
literature is of the same brand and independent of the procurement
strategy. In turn, the market is not affected directly by the OEM’s
procurement mode. However, the products in our setting under dif-
ferent procurement strategies are heterogeneous in brand and quality.
Moreover, we focus on the impact of downstream logistics on upstream
procurement rather than the impact of contracts on procurement, as in
Wang et al. (2014) and Kayiş et al. (2013).
Third, compared with the literature related to logistics, such as
Wang and Pan (2012) and Ma et al. (2013), who emphasize the choice
of logistics mode, we also discuss two logistics modes but focus on the
procurement mode preferences of e-retailers with different logistics
modes. In our setting, the logistics mode is already an inherent attribute
of e-retailers, and it is not easy to make decisions. In addition, some
literature focuses on the relationship between the firm and third-party
logistics providers and contract design (Cai et al., 2013; Wu et al.,
2015). By contrast, we use the most common form of contract, mainly
to explore the firm’s own brand building and procurement strategy,
rather than the relationship with other members of the supply chain.
In addition, different from the literature considering the quality-
dependent demand (Seifbarghy et al., 2015; Maiti and Giri, 2017; Chen
et al., 2017), which generally assumes that although the market is in-
fluenced by product quality, the change in the sensitivity to demand
impact when quality is decided by different decision makers is not
considered. However, since in our setting, different procurement stra-
tegies mean products of different brands, the inherent customer cog-
nitive preferences for different brands directly lead to their different
sensitivity to product quality.
Finally, the effectiveness and efficiency of logistics systems are
critical success factors for e-commerce (Ramanathan, 2010), and
accurate, fast, reliable, and punctual order delivery is pivotal for
online retailers (Hou et al., 2018). Customers have different pre-
ferences for e-retailers of different logistics modes; that is, demand is
sensitive to logistics modes, which most of the literature does not
take into account. To this end, we set different parameters for the
impact of different logistics modes on demand, which enriches and
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Electronic Commerce Research and Applications 35 (2019) 100853
improves the existing literature on logistics and provides a more
detailed reference for e-retailers to choose procurement strategies
based on their own logistics influence.
3. Problem description
Consider an e-retailer (she) who purchases products from a manu-
facturer (referred to as “direct procurement”) or from a midstream
brand-name company (referred to as “indirect procurement”). In the
direct procurement mode, the e-retailer contracts with the manu-
facturer and directly controls product quality. In the indirect procure-
ment mode, the e-retailer contracts with the brand-name company,
which is well-known to consumers, and purchases the products from the
manufacturer. In these business examples, two types of e-retailers are
considered to explore the impact of logistics mode on procurement
strategies: self-built logistics and third-party logistics. The e-retailer
under self-built logistics directly controls the logistics link and de-
termines the logistics service level. However, the e-retailer under third-
party logistics employs the third-party logistics provider to complete
the delivery service. For simplicity, the e-retailer, the manufacturer, the
brand-name company and the third-party logistics provider are denoted
by e, m , b and t, respectively.
The buyer, either the e-retailer or the brand-name company, can de-
termine the quality of the product according to its own needs. We in-
troduce qe and qb to measure product quality, which is controlled by the e-
retailer in direct procurement and by the brand-name company in indirect
procurement, respectively. The raw materials and technology that the
manufacturer invests determine product quality, and thus, the purchase
price of the product is related to its quality. As a large distributor, the
brand-name company has a high reputation and an enormous consumer
base, which results in a certain price advantage when purchasing products.
Specifically, we denote the purchase costs of the e-retailer in the direct
procurement mode as w + ce qe . The brand-name company enjoys a dis-
count in the indirect procurement mode and w + cb qb , where
> 1, < 1 and cb < ce is a given sensitivity parameter. Specifically,
when the brand-name company gets the same discount on the fixed
wholesale price and the quality-related wholesale price, the brand-name
company’s procurement cost can be denoted as (w + ce qb ) . In addition,
in the indirect procurement mode, the brand-name company resells the
products at a price wb per unit to the e-retailer.
We characterize the logistics service levels as se and st to measure the
effort exerted by the e-retailer under the self-built logistics and the third-
party logistics provider under third-party logistics during the delivery
process. The logistics service costs of the e-retailer and the third-party
logistics company are ke se and kt st , respectively, where > 1, ke and kt
are the sensitivity parameters representing how the cost is related to the
logistics service level. In practice, the third-party logistics company may
consolidate the shipments of different shippers and benefit from econo-
mies of scale in the product delivery service (Li et al., 2016). Without loss
of generality, we assume that kt < ke captures the cost advantage of the
third-party logistics service. In addition, in the third-party logistics mode,
the third-party logistics provider is provided with a traditional unit pricing
contract (Akşin et al., 2008; Ren and Zhou, 2008) under which the e-
retailer sets a flat logistics service price l per unit of product.
It is widely known that total consumer demand is attribute-dependent
(Federgruen and Heching, 1999). As is fairly common in many current
models (Kim and Lee, 1998; Jung and Klein, 2005; Bernstein and
Federgruen, 2004; Li et al., 2016), we adopt a log-separable form of
market demand Dij = (Ai p) qi i s j j , where i {e , b} and j {e , t } .
Without loss of generality, we assume that the base demand Ai satisfies
Ae = Ab = A . We relax this assumption to discuss the impact of brand
premium in a model extension. In addition, to ensure that the hetero-
geneity of consumers’ preferences among different modes of procurement
and logistics is reflected in the sensitivity of demand to quality and the
logistics level, we set e and b as the influence of quality on market
M. Xu, et al.
demand in the direct procurement and indirect procurement modes and e
and t as the influence of the logistics service level on the market demand
under self-built logistics and third-party logistics. Furthermore, without
loss of generality, we posit that i (0, 1), j (0, 1) , but we impose no
restriction on the relationship between them.
Based on the above description, the problem on which we focus is
the choice of the optimal procurement strategy for the e-retailer under
different logistics modes, that is, whether the e-retailer should directly
control her procurement activities and create her own brand and how
do different logistics systems affect her procurement decisions. Notably,
the e-retailer, as the Stackelberg leader, first decides the procurement
modes. Then, under the direct procurement strategy, the e-retailer is
fully responsible for the procurement stage decision. However, under
the indirect procurement strategy, the e-retailer needs to make deci-
sions based on the decisions of the brand-name company. Without loss
of generality, both supply chain members are risk neutral and attempt
to maximize their profits.
All the parameters and decision variables used in our model are
summarized in Table 1.
4. E-retailers’ procurement strategies under self-built logistics
In this section, we focus on the e-retailer’s procurement strategy
choices under self-built logistics; separately formulate the models for each
case, namely, direct procurement under self-built logistics (Case DS) and
indirect procurement under self-built logistics (Case IS); derive the solu-
tions for the parties’ decisions and profits; and then present the equili-
brium procurement strategies. For simplicity, some key but complex
threshold values are represented by symbols (ce and ce ), and the specific
formulation is reported in the Appendix. All results presented here are
obtained analytically, and proofs are provided in the Appendix.
Table 1
Notations and definitions for parameters and variables.
Notations Definitions
Parameters w Fixed procurement cost
Sensitivity of procurement cost to quality
Discount that brand-name company obtains
On the fixed procurement cost
cb Discount that brand-name company obtains
On the quality-related procurement cost
ce Quality-related procurement cost that e-retailer
obtains
Sensitivity of cost to the logistics service level
k e (kt ) Service capability of e-retailer (third-party
logistics provider)
A The base demand
Sensitivity of market demand to the price
e ( b) Influence of quality on market demand in the
direct(indirect) procurement mode
e ( t) Influence of logistics service on market demand
under the
Self-built logistics(third-party logistics)
Decision variables qe (qb) Product quality under direct(indirect)
procurement mode
se (st ) Logistics service level under self-built logistics
(third-party logistics)
wb Resale price set by the brand-name company
p Retail price
Performance variables Dij Market demand in different situations,
i {e , b}, j {e, t }
b Brand-name company’s profit
Third-party logistics provider’s profit
t
ij E-retailer’s profit in different situations,
i {D , I }, j {S , T }
5
Electronic Commerce Research and Applications 35 (2019) 100853
4.1. Procurement strategies under self-built logistics
Consider the procurement strategies of an e-retailer with self-built lo-
gistics systems, such as JD.com and Amazon, where the level of logistics
service is directly controlled by the e-retailer. The e-retailer first chooses
whether to create her own brand, that is, whether to purchase product
directly from the manufacturer, and then makes corresponding decisions
under the selected procurement mode. In particular, we investigate the
timing of the two procurement strategies under self-built logistics in Fig. 1.
If the e-retailer chooses the direct procurement strategy, she de-
termines the product quality in the procurement stage and then decides
the logistics service level and retail price in the logistics stage. Otherwise,
in the case of the indirect procurement strategy, the brand-name company
first determines the product quality and the resale price, and then, the e-
retailer chooses a logistics service level and a retail price. Next, we use
backward induction to calculate the equilibrium results of the two pro-
curement strategies under self-built logistics, respectively.
4.1.1. Case DS: direct procurement strategies under self-built logistics
We first analyse the case DS, in which the e-retailer has sufficient
control over the product in the procurement and transport stages. The
e-retailer’s problem is to determine the optimal product quality, logis-
tics service level and retail price to maximize her profits, as follows:
max DS = (p w ce qe ) Dee ke se Dee ,
(qe, se, p) (1)
where the first item is the net income from sales and procurement ac-
tivities and the remaining items are the e-retailer’s costs of providing
logistics service level se . In addition, based on the previous section, the
market demand satisfies Dee = (A p) qe e se e . By the first-order con-
ditions, we can easily obtain the e-retailer’s optimal decisions, as illu-
strated in Table 2.
4.1.2. Case IS: indirect procurement strategies under self-built logistics
In case IS, the e-retailer has the right to determine the logistics
service level, but in contrast to the case DS, she no longer directly
manages the product quality, which is instead determined by the brand-
name company. Recall that as a more influential player, the brand-
name company would be able to obtain a lower wholesale price
w + cb q and determine the resale price wb when cooperating with the
e-retailer. Thus, the e-retailer should make her optimal decisions after
observing the resale price and quality of the brand-name company.
Accordingly, we denote by IS and b the profits for the e-retailer and
brand-name company in case IS and state the problem as a standard
two-stage game as follows:
max b = (wb w cb qb ) Dbe
(qb, wb)
subject to:
max IS = (p wb) Dbe ke se Dbe ,
(p, se ) (2)
where Dbe = (A p) qb e Solving the problem by backward induc-
b s e.
tion, the optimal strategies for the e-retailer and the brand-name
company in case IS are shown in Table 2.
Through the analysis of the outcomes, we find that the market’s
sensitivity ( e or b ) to product quality prompts the brand maker
(e-retailer or brand-name company) to improve product quality
q DS q IS
( e > 0 and b > 0 ). This phenomenon reveals that product pur-
e b
chasers should consider consumers’ attention to product quality as
an important indicator when they decide to develop their own brand
products. For instance, NetEase cooperates with manufacturers of
famous brands and has high requirements for product quality. In
addition, the e-retailer increases the service level when the market is
seDS s IS
more sensitive to the logistics service (> 0 and e > 0 ). For in-
e e
stance, JD.com provides time-limited service for many cities with
M. Xu, et al. Electronic Commerce Research and Applications 35 (2019) 100853

Fig. 1. Timeline of the two procurement strategies under self-built logistics.

Table 2 understand this seemingly counterintuitive result, we can recall that as

Summary of equilibrium outcomes under self-built logistics. sensitivity increases, the e-retailer is more willing to improve the lo-
Case DS Case IS
gistics service level to increase demand. Compared with the positive
effect of control power on quality, the increased demand due to im-
e-retailer’s decisions proving the service level is even greater. Thus, the e-retailer is more
quality (qe ) 1 – inclined to cooperate with the brand-name company and take full ad-
e (A w)
ce (2 + e+ e ) vantage of her own logistics advantages to obtain a benefit.
service level 1 1
e (A w) e ( + e )(A w)
(se ) ke (2 + e+ e ) ke (2 + e)(2 + b+ e )
price ( p ) 2 5. E-retailers’ procurement strategies under third-party logistics
(A + w) + A ( e + e ) (A (3 + b) + w )( 2 + e ) + A ( b 2 + e)
(2 + e + e ) (2 + e )( b + e + 2 )
brand-name company’s decisions Next, we first derive the supply chain members’ optimal decisions
quality (qb ) –
b (A w)
1
under direct and indirect procurement and then analyse the e-retailer’s
cb (2 + b+ e ) equilibrium procurement strategies under third-party logistics.
resale price – (A + w) +A b+ w e
(wb ) ( b+2 + e)
5.1. Procurement strategies under third-party logistics

In contrast to the case of self-built logistics, in this case, the e-re-

more time-sensitive consumers. Meanwhile, the price is adjusted to a
higher level to offset the cost resulting from the increases in quality
and the logistics service level.
4.2. Equilibrium procurement strategies under self-built logistics
Based on the results obtained in the previous subsection, de-
termining the profits of the e-retailer under different procurement
strategies is easy. By comparing the equilibrium profits in direct pro-
curement and indirect procurement, we obtain the following findings.
Proposition 1. The e-retailer with self-built logistics prefers direct
procurement when ce < ce , while prefers indirect procurement when ce < ce .
Proposition 1 and Fig. 2(a) show that the e-retailer is willing to
develop self-owned brands if her procurement cost is not too high;
otherwise, she would rather give up the right to control quality and just
be a brand name product (i.e., a “porter”). The e-retailer trades off two
aspects when choosing the procurement mode: control power and cost.
On the one hand, direct procurement shortens the intermediate link of
product circulation, and the e-retailer can better control product quality
by establishing her own brand. On the other hand, compared with the
brand-name company, the e-retailer has obvious disadvantages in
purchasing when dealing with manufacturers, and her lack of pur-
chasing and brand-building experience makes her face high costs. As a
result, as long as the procurement cost is within the range of acceptable
and the positive effect of control power dominates the negative effect of
cost, the e-retailer benefits from direct procurement.
By analysing the impact of self-built logistics on demand, as mea-
tailer chooses to cooperate with the third-party logistics provider to
complete the final delivery in the logistics stage. However, similarly,
the e-retailer first decides which procurement model to adopt, and then,
participants make their corresponding decisions in each mode to max-
imize their profits. We investigate the timings of the two procurement
strategies under third-party logistics in Fig. 3.
As shown in Fig. 3, the greatest difference between self-built logistics
and third-party logistics is that the e-retailer no longer has the power to set
the level of service. Instead, the e-retailer increases the decision regarding
setting the logistics service price for hiring the third-party logistics pro-
vider, who decides the level of logistics service in the logistics stage. Next,
we use backward induction to calculate the equilibrium results of the two
procurement strategies under third-party logistics.
5.1.1. Case DT: direct procurement strategies under third-party logistics
In case DT, the e-retailer still purchases products directly from the
manufacturer but hires the third-party logistics service for transporta-
tion to reduce the high cost due to her lack of experience. Specifically,
as the Stackelberg leader, the e-retailer first determines the product
quality qe and logistics service price l. As the follower, the third-party
logistics provider sets the logistics service level st , and the e-retailer
simultaneously determines the retail price p. Accordingly, we denote by
DT
and t the profits for the e-retailer and third-party logistics service
in case DT, respectively, and model the problem as a standard two-stage
game:
max DT = (p w ce qe ) Det lDet
(qe, l)

sured by e , we find that when the demand is more sensitive to self-built subject to:
logistics, the willingness of the e-retailer to adopt direct procurement max DT = (p w ce qe ) Det lDet ,
p
actually decreases. This result seems counterintuitive because as de-
max = (l kt st ) Det ,
mand becomes more sensitive to service levels, more demand can be st
t
(3)
generated by paying the same service costs, which allows the e-retailer
to have more capital for direct procurement. However, as Fig. 2(b) il- where Det = (A p) qe e st t . Solving by backward induction, we obtain
lustrates, the e-retailer, in turn, prefers indirect procurement. To the two players’ optimal decisions, as shown in Table 3.

6
M. Xu, et al. Electronic Commerce Research and Applications 35 (2019) 100853

Fig. 2. Equilibrium procurement strategies of e-retailer under self-built logistics. Note. A = 15, b = 1, e = 0.85, b = 0.8, ke = 2, kt = 1, e = 0.8,
t = 0.8, = 1.2, = 1.1, cb = 1.

5.1.2. Case IT: indirect procurement strategies under third-party logistics as its price and quality, are not affected. For example, NetEase strictly
In case IT, the e-retailer is not responsible for the procurement and selects many logistics service providers for cooperation, but for con-
transport of the product. Similar to case IS, as the leader, the brand- sumers, the product quality and price will not change due to different
name company still decides the resale price and product quality first, logistics choices.
and IT , b and t denote the profits for the e-retailer, brand-name
company and third-party logistics provider to extend the model to a
three-stage game as follows:
Table 3
max b = (wb w cb qb ) Dbt Summary of equilibrium outcomes under third-party logistics.
(qb, 2)
subject to: Case DT Case IT
max IT = (p wb) Dbt lDbt ,
l e-retailer’s decisions
subject to: quality (qe ) 1 –
e (A w)
IT ce (2 + e+ t )
max = (p wb) Dbt lDbt ,
p logistics t (A w) t ( + t )(A w)

max = (l kt st ) Dbt , service (2 + e+ t ) (2 + t )(2 + b + t )

t
st (4) price (l )
price ( p ) (A + w) + A ( t + e ) ((A + m )(3 + 2 b) 2 + (3 + b ) t + 2
t
where Dbt = (A p) qb t Solving the problem by backward induc-
b s t. (2 + e + t ) (2 + t )( b + t + 2 )

tion, the optimal strategies for the e-retailer, the brand-name company third-party
logistics
and the third-party logistics provider in case IT are shown in Table 3.
provider’s
By outsourcing the logistics service to the third-party logistics pro- decision
vider, the e-retailer no longer has direct control over the transport service 2
1
2
1

stage, but in response to market fluctuations, the adjustment of the t (A w) t (A w)

level (st )
kt ( + t )(2 + e + t ) kb (2 + t )(2 + b+ t )
logistics service level is identical to that in the case of self-built logistics. brand-name
According to the outcomes, the optimal logistics service level can be company’s
1 1
rewritten as stDT = lDT k ( ( t
t
+ t) ) , and s = (l
t
IT IT t
kt ( + t ) ) ; namely, the decisions
quality (qb ) –
b (A w)
1

e-retailer can indirectly control the logistics service level through the cb (2 + b+ t )
logistics service price. In addition, the decisions of the e-retailer are resale price – (A + w) + A b + w t

unrelated to the attributes of the third-party logistics service (i.e., kt ). ( wb ) (2 + t + b )

This finding implies that although the e-retailer can hire different third-
party logistics service providers, the characteristics of the product, such

Fig. 3. Timeline of two procurement strategies under third-party logistics.

7
M. Xu, et al.
5.2. Equilibrium procurement strategies under third-party logistics
Following the same approach as in the case of self-built logistics, we
can derive the e-retailer’s equilibrium procurement strategies by com-
paring her profits under direct and indirect procurement. The next
proposition summarises the procurement preferences of the e-retailer
with third-party logistics.
Proposition 2. The e-retailer with third-party logistics prefers direct
procurement when ce < ce and prefers indirect procurement when ce < ce .
As we explained for Proposition 1, the e-retailer always like to
purchase products directly from the manufacturer if the procurement
cost is low. In addition to considering the control power of product
quality, the e-retailer equipped with third-party logistics will also
consider the degree of integration of the overall supply chain. The co-
operation with the third-party logistics provider means that the
downstream logistics links of the e-retailer become less centralized. To
better control upstream of the procurement stage, the e-retailer still
chooses direct procurement when the procurement cost is not very
high.
Compared to Ma et al. (2013), who investigate the equilibrium
behaviours of a two-stage supply chain including a manufacturer who
decides quality and a retailer who decides market effort. They show
that the retailer prefers to take the initiative power when the market is
less sensitive to its effort. Corresponding to our setting, this result is
consistent with the phenomenon in which e-retailer with self-built lo-
gistics is more inclined toward direct procurement if the demand is less
sensitive to the logistics service. However, our setup adds an inter-
mediate brand-name company and downstream service providers. As a
result, we obtain some different results as follows.
Although the preference patterns of the e-retailers under different
logistics systems are similar, they hold opposite attitudes toward the
procurement strategy when the effect of the logistics service on demand
becomes strong. On the contrary, the e-retailer with third-party logistics
is more willing to purchase directly when facing a more sensitive
market for logistics service. The greater the impact of third-party lo-
gistics on the market, the less the e-retailer has to worry about the loss
of control in logistics, which allows the e-retailer to give more attention
to upstream procurement. On the one hand, logistics can bring higher
demand, and the motivation to take advantage of well-known brands
will be weakened. On the other hand, controlling upstream quality can
create value together with logistics service.
Fig. 4. Equilibrium procurement strategies of e-retailer under third-party logistics. Note. A = 10, b = 1,
t = 0.8, = 1.2, = 1.1, cb = 1.
8
Electronic Commerce Research and Applications 35 (2019) 100853
6. Analysis
Thus far, we have derived the equilibrium procurement strategies
for the e-retailer under different logistics systems. In the following, we
discuss the impact of different logistics on the e-retailers’ procurement
preferences and explore the characteristics of different procurement
modes. All results presented here are obtained analytically, and proofs
are provided in the Appendix.
6.1. The impact of logistics on procurement
Based on the results obtained in the previous section, obtaining the
common and divergent procurement preference conditions of two e-
retailers is easy. For a clearer description, we summarize the results in
the following proposition.
Proposition 3.
(i) When ce < min{ c , c } , direct procurement is favored by both self-built
logistics and third-party logistics e-retailers.
(ii) When min{ c , c } < ce < max{ c , c } , e-retailers with different logis-
tics systems have different procurement preferences.
(iii) When max{ c , c } < ce , indirect procurement is favored by both self-
built logistics and third-party logistics e-retailers.
Similar to the results of a previous study Wang et al. (2014) of an
OEM choosing between two outsourcing structures, control and de-
legation, the e-retailers’ procurement preference is also related to the
procurement cost. However, in contrast to the result obtained in Wang
et al. (2014) that the OEM may prefer control over delegation when
the procurement it pays to the CM under delegation is either too high
or too low, in our setting, we obtain some new ideas. As Proposition 3
and Fig. 5(a) show, the e-retailer is willing to develop self-owned
brands when the procurement cost is not too high, regardless of what
type of logistics system she has (as shown by the light grey area in
Fig. 5(a)). The specific reasons for this phenomenon can be explained
as follows.
On the one hand, direct procurement shortens the intermediate link
of product circulation and reduces the cost caused by brand premium.
On the other hand, the e-retailer can better control product quality by
establishing her own brand as long as the procurement cost is within
the acceptable range. However, once the procurement cost is higher
than a threshold value, indirect procurement becomes the mainstream
procurement mode of e-retailers (as shown by the dark grey area in
Fig. 5(a)). Because the brand-name company has obvious procurement
e = 0.95, b = 0.9, ke = 2, kt = 1, e = 0.8,
M. Xu, et al.
Fig. 5. Equilibrium procurement strategies of different logistics systems’s e-retailer. Note. A = 12, b = 1,
= 1.01, cb = 1.
advantages, the e-retailer can earn higher profit by exploiting the dif-
ference in pricing as a reseller. Nevertheless, when the procurement
cost is moderate (as shown by the medium grey area in Fig. 5(a)), the e-
retailer’s procurement strategy relies on the logistics mode, and we will
expound upon this in the subsequent Observation 1.
As the essential difference between the direct and indirect pro-
curement strategies lies in the control power of product quality, the
sensitivity of the market to product quality is a key factor influencing e-
retailers’ motivation to establish independent brands. Fig. 5(a) also
shows that as the impact of indirect procurement on demand increases,
the threshold values first increase and then decrease. In other words,
when the demand is less sensitive to product quality, the e-retailer is
more willing to purchase directly from the manufacturer even if the
effect of the brand-name company’s product quality on demand in-
creases gradually (i.e., e > 0 and e > 0 ). However, when the sensi-
c c
b b
tivity of demand to product quality reaches a certain level, the e-re-
tailer’s motivation for indirect procurement gradually becomes stronger
as this influence increases (i.e., e < 0 and e < 0 ). The latter phe-
c c
b b
nomenon is intuitive because the greater the influence of the brand-
name company’s product quality on demand, the more consumers will
be attracted to buy products, which increases the incentive for e-re-
tailers to work with them. However, the former phenomenon is inter-
esting and worth pondering, and we explain it as follows.
A low level of sensitivity b implies a significant deficiency in the
advantages of indirect purchasing strategies, and thus, the e-retailer is
more inclined to adopt the direct procurement strategy than when b is
high. In addition, when the demand is less sensitive to product quality,
the brand-name company is willing to improve the quality to ensure a
certain level of demand, which increases the procurement cost and
leads to a higher wholesale price. The positive effect on demand is
enhanced due to the increasing sensitivity, while the rise in the
wholesale price forces the e-retailer to raise prices, which increases the
negative effect on demand. When the sensitivity b is small, this ne-
gative effect is greater than the positive effect, and as a result, the e-
retailer is reluctant to use indirect procurement even if the effect of the
brand-name company’s product quality on demand increases gradually.
Observation 1. The e-retailer with third-party logistics is more inclined
to the direct procurement than the e-retailer with self-built logistics.
Through numerical examples, we find that the relation of threshold
values is always ce > ce , which implies that under the same conditions,
the e-retailer with third-party logistics is more willing to create her own
brand. Employing third-party logistics means that the e-retailer loses
the right to set the service level, and thus, she will try her best to grasp
the right of upstream procurement when the cost is affordable. For
9
Electronic Commerce Research and Applications 35 (2019) 100853
e = 0.8, ke = 2, kt = 1, e = 0.8, t = 0.5, = 1.01,
example, YanXuan, as NetEase’s own brand, was among the first batch
of self-owned brands created by e-retailers. Because NetEase employs
third-party logistics, NetEase cannot start from the logistics service
directly; therefore, controlling product quality from the procurement
source and reducing the brand premium to improve customers’ shop-
ping experience are key. On the contrary, as an e-commerce giant,
JD.com has strong self-built logistics to provide consumers with a
higher level of logistics experience, which is why JingZao emerged
relatively late.
As analysed previously, the threshold values of the e-retailers’
procurement preferences increase first and then decrease with the
change in the demand sensitivity to indirect procurement. To analyse
the effect of b on e-retailers’ preference divergence, Fig. 5(b) shows the
variation of the difference between the two thresholds with b . Ob-
viously, when the demand is less sensitive to indirect procurement,
divergence of procurement preferences between e-retailers with self-
logistics and third-party logistics appears more likely as b increases.
To understand this result, we still consider the e-retailer with
third-party logistics. E-retailers with third-party logistics are not
only faced with the negative effect of the increased wholesale price
of brand-name companies, as mentioned before, but also cannot
hedge it by improving the logistics service. Consequently, e-retailers
with third-party logistics are more motivated to control procurement
directly. However, when the influence of indirect procurement is
relatively significant, as b increases, the procurement preferences of
e-retailers with different logistics systems are more convergent; that
is, the influence of logistics mode becomes less significant. When the
influence of indirect procurement is relatively large and increasing,
e-retailers with third-party logistics who lose their control over the
logistics link are more willing to attach themselves to the more in-
fluential brands, and as a result, the threshold value ce will decrease
dramatically.
6.2. Comparison of direct and indirect procurement
In this subsection, we analyse the main characteristic parameters,
namely, the wholesale price and sales price under different procure-
ment modes. Through the analysis of the two main features, we further
discuss the differences between the direct and indirect procurement
modes and give some management insights.
Based on the previous results, we first analyse the fluctuation rules
of sale prices with market parameters in different procurement modes.
Taking the case of self-built logistics as an example, similar results are
drawn under third-party logistics but will not be described here.
M. Xu, et al.
Fig. 6. The impact of e on the price. Note. A = 10,
Proposition 4. By analyzing the pricing of e-retailers equipped with self-
built logistics in two procurement strategies, we have:
(i) Under direct procurement,
pDS
< 0 and
pDS
e
(ii)Under indirect procurement, if e (0, (
pIS
> 0 and
pIS
e
< 0 , and if e (( 1+ b
and
pIS
> 0.
e
As analysed in previous literature, the price intuitively decreases
with an increasing cost correlation coefficient. Proposition 4 shows that
the e-retailer would like to decrease the price if the cost sensitivity to
the logistics service level increases under direct procurement or if de-
mand is significantly sensitive to logistics service under indirect pro-
curement. However, in contrast to the previous literature (Gurnani and
Erkoc, 2008), it is interesting to find that the e-retailer may decrease the
price even if the demand sensitivity to the logistics service level is high
or the cost sensitivity to the logistics service level is low under indirect
procurement when the demand is less sensitive to logistics service. In
other words, the e-retailer’s pricing rules will be totally opposite in
different procurement strategies under certain conditions. For a more
intuitive representation, we illustrate this result with figures.
As Fig. 6(a) illustrates, the e-retailer always prefers to raise the price
in case DS when the demand sensitivity to the logistics service level
increases. However, the e-retailer will reduce the price in case IS even if
the demand is more sensitive to the logistics service level because the
conflict between the positive effect of expanding demand and the ne-
gative effect of increasing cost are alleviated as the logistics service
level increases, but expanding demand simply by increasing the logis-
tics service level will not work, especially when demand sensitivity to
the logistics service level is low. As a result, the e-retailer has to si-
multaneously reduce the price to ensure a certain level of demand. By
contrast, if the sensitivity of the demand to the logistics service level is
significant, the opposite is true, which can be explained by a similar
principle as in case DS.
Fig. 6(b) illustrates another counterintuitive result in which the e-
retailer may decrease the price even if the cost sensitivity increases. If
demand is less sensitive to the logistics service level, as the cost sensi-
tivity increases, improving the logistics service level results in a
higher cost but increases demand only by a small amount, and thus, the
e-retailer would prefer to raise prices to ensure a certain profit. How-
ever, once the demand sensitivity to the logistics service level is sig-
nificant, the e-retailer is able to improve the demand to increase the
Electronic Commerce Research and Applications 35 (2019) 100853
= 1, w = 2, 1 = 0.8, cb = 1, kt = 1, = 1.05, e = 0.9, b = 0.8, e = 0.6, t = 0.85 .
profit through both price reduction and service enhancement. In addi-
tion, the more significant the cost sensitivity to the logistics service
level is (as shown in Fig. 6(b)), the wider the range of price reduction
> 0; (i.e., 1 < 2 < 3 ). This pattern occurs because if the cost sensitivity is
significant, the e-retailer will consider raising the price only when the
1+ b
1 ) ), then sensitivity of demand to the logistics service level is high enough; al-
ternatively she will continue to reduce the price to ensure a certain
) , 1), then
1
pIS
<0
level of demand.
This phenomenon partly reflects the price fluctuations that occur in
online shopping. For example, consumers are highly sensitive to the
timing of logistics when new products are released, which requires e-
retailers to improve their logistics services. In practice, many e-re-
tailers, like JD.com, attract consumers by guaranteeing the time of re-
ceipt of goods while covering the cost of their services by raising prices
in a disguised way by bundling additional products or services. Once
the product becomes less popular, e-retailers tend to offer lower prices
to attract consumers.
As previously described, the significant difference between direct
and indirect procurement is who the e-retailer’s “supplier” is. In in-
direct procurement, the product is repriced by the brand-name com-
pany after wholesaling from the manufacturer. To explore the pricing
rule of the resale price, we next analyse the properties of the resale
price under the case of third-party logistics as an example; the situation
in self-built logistics gives similar results.
Proposition 5. The brand-name company decreases the resale price when
wbIT
the cost is more sensitive to quality (i.e., < 0 ).
Whereas Seifbarghy et al. (2015) determine that the wholesale
price increases with increased cost related to quality, Proposition 5
shows a striking result that the higher the cost of increasing unit
quality, the lower the resale price that the e-retailer receives, which
can be explained as follows. Intuitively, if the cost increases, the
brand-name company will increase the resale price to obtain a higher
profit. However, market demand is closely related to product quality
and the logistics service level, which means that the brand-name
company has to consider the e-retailer’s behaviour when attempting
to increase profits. Specifically, the brand-name company attempts to
cut costs by reducing product quality when the cost is more sensitive
to quality, which directly leads to lower demand. To motivate the e-
retailer to offer a higher logistics service level and thereby ensure
sales volume, the brand-name company reduces the wholesale price
to help the e-retailer cut the purchase cost and thus improve the
logistics service level.
10
M. Xu, et al. Electronic Commerce Research and Applications 35 (2019) 100853

Table 4
E-retailer’s profits under each procurement strategy with self-built logistics when e and ce change.

e = 0.3 e = 0.6 e = 0.9

ce DS IS DS IS DS IS

3.8 5.4516 × 106 4.8195 × 106 7.2579 × 106 6.7433 × 106 1.1005 × 107 1.0599 × 107
3.9 5.3269 × 106 4.8195 × 106 7.0919 × 106 6.7433 × 106 1.0753 × 107 1.0599 × 107
4.0 5.2081 × 106 4.8195 × 106 6.9337 × 106 6.7433 × 106 1.0513 × 107 1.0599 × 107
4.1 5.0947 × 106 4.8195 × 106 6.7828 × 106 6.7433 × 106 1.0285 × 107 1.0599 × 107
4.2 4.9864 × 106 4.8195 × 106 6.6387 × 106 6.7433 × 106 1.0066 × 107 1.0599 × 107
4.3 4.8830 × 106 4.8195 × 106 6.5009 × 106 6.7433 × 106 9.8572 × 106 1.0599 × 107
4.4 4.7840 × 106 4.8195 × 106 6.3691 × 106 6.7433 × 106 9.6573 × 106 1.0599 × 107

Table 5
E-retailer’s profits under each procurement strategy with third-party logistics when t and ce change.

t = 0.2 t = 0.25 t = 0.3

ce DT IT DT IT DT IT

20 1.6328 × 106 1.3838 × 106 1.7997 × 106 1.1129 × 106 2.0019 × 106 9.0981 × 105
25 1.3384 × 106 1.3838 × 106 1.4752 × 106 1.1129 × 106 1.6409 × 106 9.0981 × 105
30 1.1377 × 106 1.3838 × 106 1.2540 × 106 1.1129 × 106 1.3948 × 106 9.0981 × 105
35 9.9167 × 105 1.3838 × 106 1.0930 × 106 1.1129 × 106 1.2158 × 106 9.0981 × 105
40 8.8042 × 105 1.3838 × 106 9.7040 × 105 1.1129 × 106 1.0794 × 106 9.0981 × 105
45 7.9269 × 105 1.3838 × 106 8.7371 × 105 1.1129 × 106 9.7190 × 105 9.0981 × 105
50 7.2166 × 105 1.3838 × 106 7.9542 × 105 1.1129 × 106 8.8480 × 105 9.0981 × 105

7. Numerical study

In this section, a numerical study is provided to visually show

how our results can be used to guide e-retailers to make decisions.
Because of the influences of procurement cost on product quality
and of logistics cost on logistics service level are obvious, we focus
our discussion in this section on the impact of some key parameters
on e-retailer’s profits under different procurement strategies and
logistics modes.
Through the results and analyses of Propositions 1 and 2, it can be
seen that quality-related procurement cost coefficient ce and the influ-
ence of logistics service on market demand e and t play crucial roles in
the selection of the procurement strategy of e-retailers. Therefore, we
first examine how e-retailers’ profits under direct and indirect pro-
curement strategies change with various settings of these parameters.
Combined with practical experience1,2 and the numerical value in the
related research (He et al., 2018; Wu et al., 2015; Seifbarghy et al.,
2015), we set the following values for the parameters:
A = 1000, e = 0.9, b = 0.9, w = 10, = 0.85, ke = 50, kt = 10, ,
Fig. 7. The difference of e-retailers’ profits under direct and indirect procure-
= 1, = = 1.01 ment strategies with different logistics.
and cb = 1. We present the related results in tabular form.
From the longitudinal observations in Table 4, when ce is small, the e-
retailer’s profits satisfy DS > IS ; that is, the direct procurement strategy direct procurement strategy is higher than that in the indirect pro-
is superior to indirect procurement when the quality-related procurement curement strategy when ce is low. This result is consistent with
cost coefficient is low, which is consistent with Proposition 1. In addition, Proposition 2. Moreover, with an increase in t , at the same level of ce ,
from the horizontal observations in Table 4, with an increase in e , at the the e-retailer’s profit increases in direct procurement but decreases in
same level of ce , the e-retailer’s profits increase and the interval satisfying indirect procurement strategy and the interval satisfying DT > IT
DS > IS decreases. For example, when increases. For example, when t = 0.25, the e-retailer’s profits satisfy
e = 0.3, e-retailer’s profits satisfy
DS > IS with c DT > IT with c [20, 30], while when t = 0.3, the e-retailer’s profits
e [3.8, 4.3], while when e = 0.9, e-retailer’s profits e
satisfy DS > IS with ce [3.8, 3.9]. These results are consistent with the satisfy DT > IT with ce [20, 45]. These results are consistent with
previous analysis of Proposition 1 and Fig. 2. the previous analysis of Proposition 2 and Fig. 4.
Next, we depict the profits of the e-retailer with third-party logistics To further analyse the impact of the logistics mode on e-retailers’ up-
under each procurement strategy in Table 5. Similarly, Table 5 in- stream procurement preference, we combine Tables 4 and 5 and provide a
dicates that the profit of the e-retailer with third-party logistics in the deeper illustration through the following figure.
Fig. 7 shows that compared with a self-built logistics e-retailer,
when ce is relatively higher, the profit of an e-retailer with third-
1
https://cn.china.cn/. party logistics in direct procurement is lower than that in indirect
2
http://www.chinaprice.com.cn/fgw/chinaprice/free/index.htm. procurement. This result indicates that the third-party logistics e-

11
M. Xu, et al. Electronic Commerce Research and Applications 35 (2019) 100853

retailer is more inclined to a direct procurement strategy, which is

consistent with Observation 1.
We take Netease, which implements third-party logistics, and
JD.com, which implements self-built logistics, as examples to verify our
results. According to relevant reports, Netease established its own
brand, Yanxuan, in 2016, covering more than 10,000 products, most of
which are in cooperation with original manufacturers supplying top
international brands, such as Gucci, Burberry and UGG. However, not
until 2018 did JD.com launch its own brand, Jingzao, which covers
more than 2000 products. Although the SKU of Jinzao has a certain
growth compared with the initial stage of establishment, it still has a
certain gap with Yanxuan.3 The above phenomenon indicates that
compared with e-retailers with self-built logistics, e-retailers with third-
party logistics focus more on product procurement and have rich pro-
curement experience, so they are more inclined to directly cooperate
with manufacturers to create their own brands. This phenomenon is
consistent with our results obtained in Observation 1.
Furthermore, Netease cooperates with a number of third-party logistics
companies to deliver products, such as ZTO, SF-express, and JD Logistics.
However, for Yanxuan products, only SF-express and JD Logistics, two
logistics systems with relatively high reputation and customer recognition,
are selected. This choice coincides with our result that with increasing
influence of third-party logistics (i.e., t ), e-retailers prefer a direct pro-
curement strategy and sell their own brand products.
Fig. 8. The impact of brand premium on e-retailers’ equilibrium procurement
strategies. Note. A = 12, b = 1, e = 0.95, b = 0.9, ke = 2, kt = 1, e = 0.8,
t = 0.5, = 1.01, = 1.01, cb = 1.
8. Extension

In addition to different procurement costs, direct and indirect pro-
curement differ in that the product is labelled with different brands. In
practice, consumers are willing to pay higher prices for branded pro-
ducts, which means that a brand premium exists when the e-retailer
sells products that she purchases indirectly. In this section, we propose
an extension to the original model that takes the impact of brand pre-
mium on the e-retailer’s procurement strategy into consideration.
To capture the brand distinction between products purchased di-
rectly and indirectly, mathematically, we assume further under the
original demand function Dij = (Ai p) qi i s j j , where i {e , b} and
j {e , t } . Without loss of generality, we set Ae = A and Ab = A + m ,
where A is the base demand and m 0 is the brand premium (Arruñada
and Vázquez, 2006; Niu et al., 2018). All other model parameters re-
main the same as in our baseline model. Notice that the case with m = 0
reduces to the baseline model. Following the same approach as in the
baseline model, we can derive the supply chain members’ equilibrium
outcomes under different logistics modes.
We can verify that the main results in the baseline model carry over
to this case with brand premium. In particular, the e-retailer is willing
to develop self-owned brands when the procurement cost is not too high
regardless of the type of logistics system; by contrast, once the pro-
curement cost is higher than a threshold value, indirect procurement
becomes the mainstream procurement mode of e-retailers. However,
when the procurement cost is moderate, e-retailers with different lo-
gistics systems have different preferences for the procurement mode.
Specifically, the e-retailer with third-party logistics is more inclined
towards direct procurement than the e-retailer with self-built logistics.
To explore the influence of brand premium on e-retailers’ procure-
ment preferences, we analyse the relationship between brand premium
and threshold values (i.e., ce and ce ) and illustrate it through the fol-
lowing proposition and Fig. 8.
Proposition 6. The threshold values are decrease with the brand premium
(i.e., me < 0 and me < 0 ).
c c
3
https://www.forbes.com/sites/janeho/2018/04/20/netease-challenges-
chinese-e-commerce-giants-on-new-battleground-own-label-retail/#
1abb93154b13.
Proposition 6 shows that the higher the brand premium, the less
willing the e-retailer is to purchase directly from the manufacturer. As
shown in Fig. 8, as m increases, the area of the light grey region shrinks,
while the area of the dark grey region expands. This finding is inter-
esting because the wholesale price increases with the brand premium,
but the e-retailer is reluctant to purchase directly even if she faces a
higher procurement cost. It is understandable that a higher brand
premium brings higher demand, and the e-retailer cannot easily obtain
recognition from consumers through her own brand even if she creates
higher-quality products. For instance, for JingZao, an independent
brand of JD.com, most of the products initially sold are daily neces-
sities, and consumers pay more attention to the quality value of these
products than to the brand value.
9. Conclusions
With the development of electronic retailing, a substantial increase
in the number of e-retailers cooperating with manufacturers and
creating their own brands has occurred. For consumers, the main dif-
ference between online shopping and brick-and-mortar stores lies in the
way products are delivered to users, and thus, logistics service is re-
garded as a powerful mean of competition among e-retailers. To explore
the procurement preferences of e-retailers in different logistics systems
when market demand depends on product quality and the logistics
service level, we study the procurement strategies of e-retailers with
self-built logistics and third-party logistics. The results and their dis-
cussion offer some novel insights on procurement choices for e-retailers
under different logistics.
The main results can be summarized as follows. First, we find that
when the procurement cost is low, e-retailers prefer direct procurement,
while when the procurement cost is high, indirect procurement is more
popular. However, when the procurement cost is moderate, the e-retailer
with third-party logistics is more inclined to direct procurement than the e-
retailer with self-built logistics. Second, as the demand becomes more
sensitive to the logistics service level, the e-retailer with self-built logistics
is more inclined to cooperate with the brand-name company, while the e-
retailer with third-party logistics is more willing to adopt direct procure-
ment. Third, we also find that the e-retailer may decrease the price in the

12
M. Xu, et al. Electronic Commerce Research and Applications 35 (2019) 100853

case of indirect procurement even if the cost is more sensitive to the lo- we have discussed our model in a certain environment where market
gistics service when the influence of the logistics service on demand is demand is determined by product quality and the logistics service level.
significant, whereas the opposite is true for direct procurement. However, the market is actually affected by numerous factors, and thus,
Our results have several managerial implications. First, for an e-retailer considering the issue in a random environment may be more re-
who is in the early stage of development, the lack of mature experience presentative and offer some valuable managerial insights. In addition,
and social influence represent distinct disadvantages when dealing with competition between the e-retailer and the brand-name company may
upstream manufacturers. Relying on the brand-name company to expand occur when the brand-name company sells products through online
the market, as many existing e-retailers do, is wise. With continuous im- channels. In such a case, the two sides need to weigh the pros and cons
provement of business maturity and the consumer market foundation, e- of cooperation and competition, which may influence the e-retailer’s
retailers should move towards a more centralized supply chain and take choice of operation mode.
greater initiative. In addition, e-retailers should take advantage of the
convenience of changing prices online and formulate corresponding pri-
cing mechanisms for products from different procurement channels to Acknowledgement
better adapt to market fluctuations. Moreover, when the consumption cost
of improving unit quality is higher, brand-name companies should adopt This work is supported by the National Natural Science Foundation
the strategy of a low marginal price to increase market share. However, of China (No. 71771164 and No. 71702129), the Humanity and Social
when improving quality is not expensive, the brand-name companies Science Youth Foundation of Ministry of Education of China (No.
should focus on higher marginal prices. 17YJC630232) and Tianjin Municipal Science and Technology Project
There are several interesting directions for future research. Thus far, (18ZLZXZF00380).

Appendix A

Before providing the proofs of propositions, we first derive the results of Tables 1 and 2.
Proof of Table 1. In Case DS, the e-retailer determines the quality, logistics service level and price simultaneously. The e-retailer’s profit function
DS = (p w ) Dee (ce qe + ke se ) Dee , (5)

where Dee = (A p) qe e se e .
Before solving the problem, we first verify the corresponding Hessian matrix, given as follows
a11 a12 a13
H = · a12 a22 a23 ,
a13 a23 a33

where a11 = 2 , a22 = 1((1 2 e ) ce qe + 2 e ( e 1)) 1 ((1 2 e ) k e se + 2 ( 1) ( 1 2 ) e + ce qe ( 1 2 ) e + ke se 1( 2 e e e k e se e ce q )

, a33 = , a12 = , a13 = , a23 = ,
qe2 se2 qe se qs

1 =A p, 2 = p w ce qe ke se , = qe se .e e

Define 1 = ce qe 1 e e 2, 2 = ce qe + 1 e 2 e , 3 = k e se (2 e + 1) 2 e( e 1), 4 = k e se + e, 5 = k e se + 1 e 2 e .
2 2
1 5+ 3 2+2 2 4 5
When conditions > 0 and < 2 satisfied, the judgement of the sequential principal minors of the Hessian matrix H is equivalent
1 ( 1 3 + 4)
to
a11 = 2 < 0,
2
a11 a12 2 1 1 2
a21 a22 = qe2
> 0,

a11 a12 a13

a12 a22 a23 = 1 ( 3 (2 1 1
2
2) 2 2 4 5 1
2
5 +2 1
2
4) < 0,
a13 a32 a33 qe se

which can deduce that the e-retailer’s profit is concavity with respect to qe , se and p.
Thus, solving the first-order optimality conditions for qe , se and p

DS (A p)(( e + ) ce qe + (w p + k e se ) e ) qe e se e
qe
= q
= 0,
DS (A p)(( e + ) k e se + (w p + ce qe ) e ) qe e se e
se
= q
= 0,
DS
p
= (A + (w 2p) + ce qe + ke se ) qe e se e = 0,

1 1
we have qeDS = ( ce (2
e (A
+
w)
e+ e ) ), seDS = ( k e (2
e (A
+
w)
e+ e ) ),p DS =
(A + w ) + A ( e + e )
(2 + e + e )
.
In Case IS, the brand company as the Stackberg game leader first determines the product quality and resell price, based on which the e-retailer
decides the logistics service level and price. Similarly, we begin from the e-retailer’s profit
IS = (p wb) Dbe ke se Dbe ,

where Dbe = (A p) qb b se e .
Solving the first-order optimality conditions

13
M. Xu, et al. Electronic Commerce Research and Applications 35 (2019) 100853

IS 1
se
= (s e (ke se
se e
( e + ) e (p w 2 ))(A p) qb b) = 0,
IS
p
= qb b se e (A + (w 2 2p) + ke se ) = 0.

1
Solving the above equations simultaneously, we can get p =
A( e + ) + w
(2 + e )
2
, se = ( e (A w 2)
k e (2 + e ) ).
By substituting p and se to the brand company’s profit

b = (wb 1 w ) Dbe cb qb Dbe ,

and the corresponding first-order optimality conditions are

s
e (A w 2)
(A w 2)( b w ( 2 1 ( b + ) qb cb )) qb b
k e (2 + s )
b
qb
= (2 + s ) qb
= 0,
s
s (A w 2)
wqb b (A w ((2 2 1) + ( 2 1 ) s ) + cb qb ( e + ))
ke (2 + s )
b
= 2 + s
= 0.
2

1
Solving the above equations simultaneously, we obtain qbIS = ( cb (2
b (A
+
1w)
b+ e ) ),w IS
b =w2=
A + 1w
(
+A
b+2
b+
+ e)
1w s
..
By substituting and 2 to p and se obtained above, we can get the optimal
qbIS and as shown in Table 1. price pIS seIS
The proof of the negation definite of the corresponding Hessian matrix is similar to the previous, thus specifically not repeat them. □
Proof of Table 2. In Case DT, the e-retailer as the Stackberg game leader, first determines quality and logistics service price, based on which the
third party logistics decides a logistics service level and the e-retailer decides a retail price simultaneously. We use the backward induction to solve
the problem, with first analyzing the optimal problems of the third party logistics and the e-retailer.
The third party logistics’ profit function

t = (l kt st ) Det ,
and the e-retailer’s profit function
DT = (p w ) Det (l + ce qe ) Det ,

where Det = (A p) qe e st t .
Similarly, we can verify that the corresponding Hessian matrix is negative semidefinite.
Thus, solving the first-order optimality conditions:

t qe e st t (A p)(kt st ( + t ) l t)
st
= s
= 0,
DT
p
= qe e st t (A + ce qe + (l 2p + w ) ) = 0.

1
We can get st = ( tl
kt ( t + ) ), p=
A + (l + w + ce qe )
2
.
Substituting st and p to the e-retailer’s profit, we obtain
t

DT 1 l t
= (A (l + w ) ce qe )2 qe e .
4 kt ( + t)

Solving the first-order optimality conditions for qe and l:

t
l t
(A (l + w ) ce qe ) qe e ( ce (2 + e ) qe + (A (l + w ) ) e )
kt ( + t )
DT
qe
= 4 qe
= 0,
t
l t
(A (l + w ) ce qe )(A t ce t qe ((l + w ) t + 2l ) ) qe e
kt ( + t )
DT
l
= 4 l
= 0.

1
We have lDT =
w) t
(2 + e + t )
(A
, qeDT = ( (A w) e
ce (2 + e + t ) ).
By substituting lDT and qe to the
DT
logistics service level and retail price, we have
1
2
t (A w) (A + w ) + A ( t + e)
stDT = , pDT = .
kt ( + t )(2 + e + t ) (2 + e + t )

In Case IT, the problem is described as a three-stage game. We also use the backward induction to solve the problem, the profits of the e-retailer
and the third party logistics
IT = (p wb) Dbt lDbt ,

14
M. Xu, et al. Electronic Commerce Research and Applications 35 (2019) 100853

t = (l kt st ) Dbt ,

where Dbt = (A p) qb b st t .
The first-order optimality conditions
IT
p
= (A + (wb + l 2p)) qb b st t = 0,
IT (A p)(( + t ) kt s l t ) qb b st t
st
= st
= 0.

Solving the above equations simultaneously can get the e-retailer’s optimal price and the third party logistics’ service level p = ,
A + (wb + l)
2
1
st = ( l t
kt ( + t ) ).
By substituting above optimal price p and logistics service level st to , and calculating the first-order optimality condition to l
t
1 l t
(A (wb + l))(A t (wb t + (2 + t ) l )) qb b = 0,
4 l kt ( + t)

(A w )
we have l = (2 +b )t .
t
Then, by substituting l to the brand company’s profit and solving the first-order optimality conditions to qb and 2

t
(A wb) t2
(( 2 1) b w ( b + ) qb cb ) (A wb) qb b
kt (2 + t )( + t )
b
qb
= q (2 + t )
= 0,
t
(A wb) t2
(A + ( + t ) cb qb ((2 2 1) + ( 2 1) t ) w ) qb b w
kt (2 + t )( + t )
b
= 2 + t
= 0,
2

1
we obtain wbIT =
A + 1w
(2 +
+A
t+ b )
b+ 1w t
, and qbIT = ( cb (2
b (A
+
1 w)
b+ t ) ).
Finally, by substituting wbIT and
qbIT to other decisions we get the optimal decisions as shown in Table 2.
The proof of the negation definite of the corresponding Hessian matrix is similar to the previous, thus specifically not repeat them. □
1+µ
Proof of Proposition 1.Define e
A w A w A w A w
e
, b b
, µe e
, b b
, N 2 + + µ , M 2 + + µ , Q 2 + +1 µ , R 2 + +1 µ , K 2 + µe ,
e e e t b e b t e
1 + µt
W 2 + µt
. Thus, the profits of the e-retailer in cases DS and IS can rewritten as
µe
N2 eN µe N
e
DS ,
ce ke
µe
Q2K 2 bQ µe QK
b
IS .
cb ke

Through comparing e-retailer’s profits under case DS and IS, we can obtain the threshold value under which the profits are equal to each other
1
b
bQ e
µe
DS IS eN Q 2K 2 µe QK cb
= ce = (denoted as ce ).
N 2 ke N

Thus, according to the obtained threshold value we can derive conditions that the e-retailer prefers on one of these procurement and logistics modes.
To be specific, DS is decrease with ce , thus, when ce < ce , it is true that DS > IS .
Proof of Proposition 2. Similar to the proof of Proposition 1, the profits of the e-retailer in cases DT and IT can rewritten as
µt
M2 eM µt M
e
DT ,
ce kt
µe
Q2K 2 bQ µe QK
b
IS .
cb ke

Through comparing e-retailer’s profits under cases DT and IT, we can obtain the threshold value under which the profits are equal to each other
1
b
bR e
µt
eM R2W 2 µt µt cb
DT = IT ce = (denoted as ce ).
M2 kt M (2 + µt )

Thus, according to the obtained threshold value we can derive conditions that the e-retailer prefers on one of these procurement and logistics modes. To be
specific, DT is decrease with ce , thus, when ce < ce , it is true that DT > IT .
Proof of Proposition 3. Combine the results of Propositions 1 and 2, the results of Proposition 3 can be obtained.
Proof of Proposition 4. Calculating the first derivatives of the prices pDS and pIS respected to and e , Proposition 4 can be easily obtained.

15
M. Xu, et al.
Proof of Proposition 5. Calculating the first derivatives of the wholesale price wbIT respected to , Proposition 5 can be easily obtained.
Proof of Proposition 6. Calculating the first derivatives of the threshold values ce and ce respected to m, Proposition 6 can be easily obtained.
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