Supplier Encroachment as an Enhancement or a Hindrance to Nonlinear Pricing

Abstract

T he objective of this study was to extend existing understanding of supplier encroachment to contexts in which there is information asymmetry and the supplier can use nonlinear pricing. Prior research has shown that supplier encroachment can mitigate double marginalization and thus benefit both the supplier and the reseller. However, under symmetric information, this benefit disappears if the supplier can use nonlinear pricing. In our model, the reseller observes the true market size while the supplier knows only the prior distribution, that is, a seemingly ideal setting for implementing mechanism design through nonlinear pricing. We first show that, because encroachment capability enables the supplier to make an ex post output decision, it fundamentally alters the structure of the optimal nonlinear pricing policy. In addition to the usual downward distortion effect, where the reseller may purchase less than the efficient quantity, we also have the possibility for upward distortion. Thus, under asymmetric information and nonlinear pricing, supplier encroachment has two opposing effects. On one hand, the ability to shift sales to the direct channel allows the supplier to reduce information rents with less sacrifice of efficiency; but on the other hand, by introducing the possibility of her own opportunistic behavior, it can result in upward distortion of the quantities sold through the reselling channel, which is a new source of inefficiency. Depending upon the relative efficiency of the reselling channel and the demand distribution, either of these two effects may dominate and the supplier's ability to encroach may either benefit or hurt both the supplier and the reseller.

Inducing Supply Chain Transparency through Supplier Encroachment

“…() and Li et al. (), indicating that in comparison to the supplier, the retailer should possess some advantages in the sales process, such as more direct contact with consumers or economies of scale with other retailing activities. Additionally, we restrict to preserve the supplier’s minimum incentive to engage in encroachment; otherwise, the supplier never encroaches on the retail market even with the highest quality level m = 1.…”

“…To highlight the mutual effect between information disclosure and channel structure, we adopt a classic encroachment framework based on Arya et al (2007), Li et al (2014) and Li et al (2015) but incorporate asymmetric quality information. At the beginning, the supplier needs to commit to whether a direct sales channel is built in addition to the traditional retail channel.…”

The implication of capacity reservation contracts in assembly system with asymmetric demand information

“…In the screening game, the less informed player tries to incentivise the player who has superior information to reveal his private information (e.g. Ha and Tong 2008;Li, Ritchken, and Wang 2009;Gan, Sethi, and Zhou 2010;Babich et al 2012;Lee and Yang 2013;Li, Gilbert, and Lai 2015). In contrast, in the signalling game, the player with superior information actively reveals his private information to gain cooperation from others (e.g.…”

Nonlinear pricing with consumer satiation

“…Finally, we summarize all findings in Section 4. All proofs are presented in the Appendix, and the supplement 1 Interestingly, upward distortion in quantity is also documented in [10] within the context of supplier encroachment. However, the driving force in this case is the lack of commitment on the part of the supplier (principal).…”

“…Interestingly, upward distortion in quantity is also documented in within the context of supplier encroachment. However, the driving force in this case is the lack of commitment on the part of the supplier (principal).…”