Supplier Encroachment with a Dual‐Purpose Retailer

Abstract

The development of e‐commerce has greatly facilitated the practice that suppliers encroach upon the retail realm of downstream retailers through direct channels (e.g., online stores). The literature in this area has investigated profit‐maximizing firms, but the role of other organizational structures is not well understood. This study studies supplier encroachment in which the retailer is a dual‐purpose corporation that pursues his own profit as well as consumer surplus. We find that the retailer's pursuit of consumer surplus can not only intensify market competition and thus reducing the margin of direct selling, but also motivate the encroaching supplier to set a higher wholesale price compared with the case of no encroachment. The presence of a dual‐purpose retailer reduces the effectiveness of using the wholesale price as a lever by the supplier. Therefore, encroaching upon a dual‐purpose retailer can hurt the supplier. We examine whether a retailer can benefit from being a dual‐purpose corporation and how the retailer's dual objectives affect consumer surplus. Interestingly, a dual‐purpose retailer can earn a higher profit than a for‐profit retailer as the dual‐purpose structure helps deter encroachment (i.e., doing well by doing good). Also, consumer surplus in the case of a dual‐purpose retailer can be lower than that with a for‐profit retailer. This is because the commitment to be a dual‐purpose retailer reduces supplier encroachment and thus reduces the total quantity sold to consumers.

Supplier Encroachment in the Supply Chain in the E-Commerce Age: A Systematic Literature Review

“…Zhang et al [49] find that the retailer developing a store brand as the lower-quality substitute of the supplier's national brand can effectively deter encroachment, while establishing a premium store brand cannot. Wang and Li [50] demonstrate that the presence of a dual-purpose retailer will reduce the margin of a direct channel and it plays a critical role in deterring the supplier's encroachment.…”

“…The impacts of supplier encroachment have been widely examined under different information structures. Most existing studies present diversified scenarios and results when the information between the supplier and the retailer is symmetric (e.g., [6,7,19,33,35,38,40,47,50,56,57]). For example, Arya et al [1] consider a Cournot competition under the symmetric demand information and show that encroachment can reduce the wholesale price for the incumbent retailer.…”

“…Zhang and Zhang [48] incorporate the e-tailer's demand information sharing strategy into the supplier's direct entry decision by considering agency selling and reselling agreements. Wang and Li [50] explore the supplier's encroachment behavior in the supply chain where the dual-purpose retailer pursues not only her own profit but the consumer surplus. It has been found that introducing the direct selling channel may ultimately damage the supplier under the interaction of encroachment and the retailer's interest in consumer surplus.…”

“…In addition, the supplier also establishes his own online/offline channel to provide final consumers with products directly. The supplier's production cost and the retailer's selling cost are normalized to zero and the supplier's per-unit direct selling cost is normally denoted as c, which reflects that the supplier has an advantage in production and the retailer has an advantage in the sales process [1,2,12,22,23,35,43,50,56,60,62]. The retailer's advantage might come from the superior knowledge of customer preferences, more direct contact with customers, or economics of scope with other retailing activities [1,35,56,60], while the supplier lacks experience in selling directly to consumers [43].…”

“…where a denotes the market size, Q = q s + q r is the total quantity sold in the retail market, and b can be described as the price sensitivity which is strictly positive constants [1,50,62].…”