Manufacturer encroachment with an e‐commerce division

Abstract

Traditionally, manufacturer encroachment is investigated under an integrated organizational structure where online business decisions are made at the whole firm level. However, with the establishment of a specific e‐commerce division, the manufacturer has the flexibility to delegate the decision‐making of the online business to its e‐commerce division to maximize the online revenue under a decentralized structure. We study manufacturer encroachment in a supply chain, where a manufacturer sells through a bricks‐and‐mortar retailer and plans to deploy its e‐commerce division to launch the online direct‐to‐consumer business. Different from prior research, we endogenize the manufacturer's choice between the integrated and the decentralized structures in its encroachment pursuit. Our results suggest that the decentralized structure could enlarge the manufacturer's feasible range to encroach, but it would also intensify the competition between the e‐commerce division and the retailer. Therefore, choosing the decentralized structure does not necessarily yield a higher profit for the manufacturer because the loss in the retail channel may be hard to offset due to the intensified competition. Instead, choosing the integrated structure could lead to a win–win–win outcome for the manufacturer, retailer, and e‐commerce division when the direct selling cost is sufficiently low. Although the manufacturer may benefit from encroachment under both organizational structures, it should not encroach when the direct selling cost is between low and moderate. Notably, the bright side of manufacturer encroachment's impact on the retailer still exists under the decentralized structure. We also study some alternative settings, including consumers’ offline hassle cost, market‐based transfer price, and quantity competition, to obtain additional insights.