Direct or Indirect? Implications of the retailer’s investment choices on the manufacturer’s encroachment strategy

Abstract

Nowadays, retailer investment is becoming increasingly prevalent in real life. This paper focuses on a retailer’s optimal investment strategy selection problem in a game model consisting of a manufacturer and a retailer. The manufacturer may establish a direct selling channel. For the same amount of money, the retailer has two investment choices: indirect investment through investing in upstream manufacturer’s equity or direct investment through investing directly in its retail channel marketing. We compare the equity investment case and the channel investment case to identify the optimal investment decisions and investigate the behavior patterns of the manufacturer and the retailer in both cases. The following results are obtained. First, instead of the frequently researched investment approach — channel investment, which is always an effective anti-encroachment measure for the retailer, the equity investment may promote the establishment of the manufacturer’s direct selling channel. Second, the retailer may benefit from manufacturer encroachment in the case of equity investment. In contrast, the retailer will get hurt once encroachment occurs under the channel investment case. Finally, the retailer’s optimal investment strategy critically depends on the difficulty between equity investment and channel investment. Particularly, the investment approach with a higher investment difficulty will be the best choice for the retailer.