Strategic Contracting and Supplier Encroachment Through an E-commerce Platform

Abstract

This paper considers a supplier's encroachment strategy through an e-commerce platform. When the supplier sells goods through an online channel in addition to a traditional retailer, it should either select a conventional wholesale contract or an emerging agency contract. Under the agency contract, the supplier can directly set its retail price while sales revenues are split with the platform according to a royalty rate (also called a commission rate). The platform should determine its optimal royalty rate by considering the supplier's decision on which contract to select. I show that the royalty rate is set at the highest level possible while still inducing the supplier to choose the agency contract, above which, the wholesale contract is chosen. Moreover, compared with when the supplier does not encroach, adding the online channel is beneficial to the encroaching supplier but is detrimental to the traditional retailer. More interestingly, all firms (a supplier, retailer, and platform) can benefit from recent industrial changes from traditional wholesale agreements toward agency agreements when brick-and-mortar and online channels are highly substitutable.