Abstract: A supply chain with both direct internet and traditional marketing channels is discussed in this paper. For the traditional marketing channel, it is assumed that the wholesale and retail prices are fixed. Also, for such a supply chain, demand uncertainty is considered. The objective is to optimize the price and inventory for the direct channel as well as the order quantity for the traditional channel. A mathematical model is developed for this problem. Based on this model, numerical analysis is carried out to reveal the mechanism of the supply chain. It is shown that an acceptable direct marketing price exists when the market share is in a certain range. When the direct price is not lower than the wholesale price, an equilibrium solution can be found even if the market share is smaller. In a certain market share range, the whole sale can be made unchanged by increasing inventory for the direct channel and reducing the order quantity for the traditional channel. In this way, the expected profit increases for the retailer, while, for the supplier, the expected profit decreases from the retail channel, increases from direct channel with the whole profit increased. Thus, it is beneficial to the whole supply chain.

Key words: dual channel, supply chain, pricing, inventory