Information-sharing strategy and manufacturer encroachment under advertising investment in gray markets

Abstract

This study investigates how the manufacturer’s encroachment strategy and the retailer’s information-sharing strategy interact in gray markets under advertising investment. Different from the traditional view which holds that the retailer should retain private information to maintain an information advantage, we find that the retailer can strategically use private information to induce the manufacturer’s encroachment to improve investment level and increase potential market demand. We also derive the manufacturer’s optimal encroachment strategy. When the encroachment cost is extremely low (high), whether the retailer share information or not, the manufacturer will (will never) encroach. Particularly, when the cost is in the middle range, the encroachment decision depends on the retailer’s information sharing choice: the manufacturer encroaches when information is shared and does not encroach when information is not shared. Moreover, when the manufacturer effectively combats the gray market through encroachment, the retailer still has motivation to share information.