Risky Supplier Encroachment and Reliability Investment Spillover

Abstract

The common wisdom is that a retailer will get hurt when its wholesale supplier encroaches on the retailer’s territory by selling directly to the same end market. Motivated by practices in variety of industries that supplier with random supply loss maintain dual channel structure, this study demonstrates that a retailer may benefit from supplier encroachment. The encroachment incentivizes the supplier to invest more in improving its supply reliability, and this investment can spill to and benefit the retailer. Although the encroachment always decreases the contribution margin the retailer obtained, the spillover effect increases the retailer’s profit as long as the competition caused by encroachment is not extremely fierce. Eventually, Pareto gains arise in the supply chain. To check the robustness of the spillover effect, we extend the main model with considering selling cost, supplier’s positive production cost, nonlinear investment cost, bargain power, and decentralized encroachment, respectively. In these extensions, the retailer still could benefit from the encroachment, which means the spillover effect is robust.