Supplier Encroachment and Retailer Effort

Abstract

We propose simple dual-channel models in which an upstream manufacturer trades with a downstream retailer that is able to engage in cost-reducing activities. When the manufacturer determines whether to encroach on the downstream market after observing the retailer's effort level, the threat of manufacturer encroachment can work as a disciplinary device to induce the retailer to aggressively engage in cost reductions, after which the manufacturer refrains from encroaching further on the downstream market. The disciplinary device is more likely to improve consumer welfare and social welfare, although the encroachment itself can harm social welfare.