The manufacturer’s encroachment strategy in the presence of the retailer’s in-store service

Abstract

We examine the manufacturer’s encroachment strategy in the supply chain in the presence of the retailer’s in-store service. The manufacturer has the option of encroachment with a direct channel, and the retailer has the option of providing in-store service. If the retailer decides to offer service, it sets the service level. We show that in the presence of in-store service, the manufacturer is less likely to encroach on the retail market than in the absence of in-store service. The retailer always prefers to provide in-store service. If the manufacturer decides to encroach, it will strategically use its direct channel with no sales as a threat to the retailer, independent of whether or not the retailer provides in-store service. The retailer can be better off with manufacturer encroachment, but it can be worse off when consumer sensitivity to in-store service is very low. We show that the retailer can strategically employ in-store service to deter the manufacturer’s encroachment when the consumer sensitivity to in-store service is sufficiently high.