Supplier Encroachment, Marketplace and Counterfeiting

Abstract

We study the impact of counterfeiting on a brand-name supply chain’s strategic choice of channel structures and how these structures in turn affect the counterfeiting market. In our model, the supplier can practice costly encroachment by launching a direct channel to sell brand-name products, and the retailer can choose between traditional wholesaling of buying from the supplier and reselling to customers and marketplace which matches the supplier with interested buyers and charges a commission fee for each product sold through this matching. The presence of counterfeiting creates two levels of competition that occur not only between the supplier’s and retailer’s respective channels in the brand-name market, but across the markets of brand-name products and counterfeits. These two levels of competition drive novel insights not present in a market without counterfeiting. Our results show that supplier encroachment and marketplace serve similar roles in counteracting counterfeiting but have different payoff implications. Specifically, for retailers operating brick-and-mortar stores with wholesaling being a more realistic option, supplier encroachment, given that it exists, has a more pronounced effect of curbing counterfeiting when counterfeits are highly competitive, although these counterfeits in turn reduce the supplier’s incentive of encroaching. Moreover, the retailer’s adoption of marketplace can also curb counterfeiting, and can often curb it so much that results in Pareto gains for both the retailer and supplier, which otherwise would not be possible should counterfeiting not exist. Our finding thus highlights the strength of marketplace in eliminating double marginalization within the decentralized supply chain to expand the market share. Such strength leads to higher channel profits and makes the supplier potentially better off too, despite the fact that the supplier has to give up the first-mover advantage as the retailer switches from wholesaling to marketplace.