The Bright Side of Supplier Encroachment

Abstract

The common wisdom is that a retailer suffers when its wholesale supplier encroaches on the retailer's operations by selling directly to final consumers. We demonstrate that the retailer can benefit from encroachment even when encroachment admits no synergies and does not facilitate product differentiation or price discrimination. The retailer benefits because encroachment induces the encroaching supplier to reduce the wholesale price in order not to diminish unduly the retailer's demand for the manufacturer's wholesale product. The lower wholesale price and increased downstream competition mitigate double marginalization problems and promote efficiency gains that can secure Pareto improvements.channels of distribution, encroachment, market entry, retailing and wholesaling

Retailer's Product Line Choice with Manufacturer's Multichannel Marketing

“…15 Although both retailers give up variety Y, they benefit from weakening the negative impact from the online store. In the range that max{θ XB (γ),θ XB (γ)} < c/a ≤ θ BB (γ), either when r 1 r 2 = XX 14 If the online store moves after the retailers, it is possible that retailers' share losses caused by the encroachment are compensated for by being charged lower wholesale prices (see Arya et al, 2007). 15 If θ XX (γ) < c/a ≤ θ XB (γ), when r 1 r 2 = XY, XB or BB, the online store sells both varieties.…”

“…Faced with the loss of power in the traditional wholesale channel, more upstream manufacturers have begun to consider the benefits of "drop-shipping" and adopting online channels through which they gain additional profits (Randall et al, 2006). The emergence of such manufacturer's multichannel marketing has brought new challenges to traditional retailers in form of competition from potential online stores (Tannenbaum, 1995;Dixon and Quinn, 2004), which is sometimes referred to as "franchise encroachment" (Arya et al, 2007;Emerson, 2010). Compared with an online store that can simply put a product variety on the Internet as necessary, a physical retailer is disadvantaged by limited display space and thus has to prudently decide which variety to order from the manufacturer.…”

“…This benefit exists only if the retailer decides its quantity before the manufacturer does so that the retailer's output reaches the Stackelberg leader's level. 2 Following the main structure of Arya et al (2007), we examine a manufacturer's encroachment problem in which a retailer decides its preferred product line, but assume quantities to be simultaneously decided to remove the Stackelberg leader's advantage and to focus on the effect of product line choices. Mizuno (2012) considers a case in which two manufacturers distribute their products to n retailers by competing for a wholesale market while simultaneously deciding whether to 1 For parallel researches, Inderst and Shaffer (2010) discusses how a supplier uses different contract forms (based on the share it receives of a retailer's total purchases or on how much a retailer purchases of its products) when retailers have out-sourcing options.…”

Pricing Strategy of Dual Channel Supply Chain under Asymmetric Information

“…Cattani et al [4] studied the manufacturer's pricing problem of dual channel supply chain by use of consumer utility theory. Aray's [5] researches indicated that when the manufacturer has production cost advantage and the retailer has distribution cost advantage, the added direct channel can realize the Pareto improvement of manufacturer and retailer in supply chain. Cai [6] et al discussed the dual channel supply chain's equilibrium pricing under the condition of consistent and inconsistent price, and pointed out that price discount contract can improve the…”

Online channel operation mode: Game theoretical analysis from the supply chain power structure

“…The channel structure composed of both the traditional offline retail channel and the online electronic channel is called the dual-channel. When the manufacturer opens the online channel, this phenomenon is called manufacturer encroachment (Arya, Mittendorf & Sappington, 2007;Li, Gilbert & Lai, 2013Li, Xie & Zhao, 2015). The manufacturer encroachment may cause severe channel conflict, because the manufacturer becomes the competitor of the downstream retailer.…”