Abstract: The issue of retailers'dual-channel strategies with price and service competition is discussed. In a duopoly market environment, a Hotelling model is presented for this problem. Then, the equilibrium solutions of prices and service level are obtained. Based on the solutions, impact of additional Internet channel on prices, service level, and profits is examined. Furthermore, in considering the behavior of information-based free-riding, it analyzes whether retailers can open direct channel. Result shows that when the differentiation among the competing retailers is not too large, an online channel can result in increase of service level and decrease of profit. Furthermore, in considering information-based free-riding behavior, any of the three channel strategies, i.e. no Internet channel, asymmetric Internet channel, and symmetric Internet channel, is the possible equilibria. Also, multichannel retailing for all retailers is a prisoner’s dilemma.

Key words: direct online channel, information-based free-riding, channel strategy