Manufacturer encroachment with quality decision under asymmetric demand information

Abstract

This paper investigates manufacturer encroachment with both endogenous quality decision and asymmetric demand information to examine the effects of encroachment and information structure on quality and profits for chain members. Manufacturer encroachment results in a signaling game where at equilibrium the retailer has to distort the order quantity downward under low market size. Our result shows that encroachment leads to a lower quality when the manufacturer’s direct selling cost is intermediate. The manufacturer always benefits from encroachment, and the retailer benefits from encroachment under an intermediate direct selling cost of the manufacturer since she can deter the manufacturer from selling directly to avoid channel competition. Results provide several information management implications. Compared to the full and no information cases, asymmetric information may increase quality when direct selling is relatively efficient while decrease quality otherwise. The manufacturer may prefer to keep information disadvantages when his direct selling cost is relatively large and the prior probability of large market size is high. Additionally, the informed retailer may be willing to share information to avoid the unexpected order quantity downward distortion in the case of asymmetric information when direct selling is efficient. As a result, the chain members reach a consensus on information sharing when the manufacturer’s direct selling cost is quite small or relatively large.