Manufacturer encroachment with equal pricing strategy

Abstract

This study investigates the interplay between manufacturer encroachment and the manufacturer’s equal pricig strategy. Encroachment happens when a manufacturer opens up a direct channel to compete with a retailer’s traditional channel. The equal pricing strategy is that the manufacturer commits to setting a direct channel retail price that equals the price determined by the retailer in the traditional channel. We first consider the setting where one exclusive retailer sells products from a manufacturer that does not have the option of selling only through its direct channel. Our results show that the availability of the equal pricing commitment enhances the manufacturer’s incentive to encroach when the channel competition is intense and the encroachment cost is medium. Interestingly, the manufacturer’s equal pricing commitment always hurts the retailer even though it eliminates the price competition between the two channels. This is because the availability of the equal pricing commitment could motivate the manufacturer’s encroachment. Our analysis shows that the manufacturer’s equal pricing commitment always improves consumer surplus and sometimes improves the supply chain performance. However, when the retailer also sells a substitutable product from a different manufacturer or the manufacturer has the option of only direct selling, the equal pricing commitment sometimes benefits the retailer and sometimes reduces the consumer surplus.