Manufacturer encroachment and product assortment under vertical differentiation

Abstract

To study channel choice and assortment selection under vertical differentiation, we propose game-theoretic models in a supply chain consisting of a two-product manufacturer and a retailer. The manufacturer can encroach to build an online channel to sell directly to consumers, in addition to selling indirectly via an offline channel operated by the retailer. This dual-channel supply chain incorporates both product competition and channel competition. Product competition exists no matter whether the manufacturer encroaches, because the products compete for same end consumers. Channel competition (i.e., the competition between the online and offline channels) occurs when the manufacturer encroaches. Although incurring channel competition, manufacturer encroachment alleviates product competition, because the dual-channel supply chain can distribute different products via different channels. We find that manufacturer encroachment causes a win-lose situation for the manufacturer and the retailer, and may benefit or harm the supply chain. When the initial product competition is fierce or the disutility of online shopping is trivial, the positive effect of alleviated product competition dominates the negative effect of incurred channel competition, and thus manufacturer encroachment benefits the supply chain. Our extended models show that the main results are robust.