Supplier Encroachment Research Articles

Supplier Encroachment with a Dual-Purpose Retailer

The development of e-commerce has greatly facilitated the practice that suppliers encroach upon the retail realm of downstream retailers through direct channels (e.g., online stores). The literature in this area has investigated profit-maximizing firms, but the role of other organizational structures is not well understood. This paper studies supplier encroachment in which the retailer is a dual-purpose corporation that pursues his own profit as well as consumer surplus. We find that the retailer's pursuit of consumer surplus can not only intensify market competition and thus reducing the margin of direct selling, but also motivate the encroaching supplier to set a higher wholesale price compared with the case of no encroachment, which is a contrast to the case of a for-profit retailer where encroachment lowers the wholesale price. The presence of a dual-purpose retailer reduces the effectiveness of using the wholesale price as a lever by the supplier. Therefore, encroaching upon a dual-purpose retailer can hurt the supplier. We examine whether a retailer can benefit from being a dual-purpose corporation and how the retailer's dual objectives affect consumer surplus. We find that a dual-purpose retailer can earn a higher profit than a for-profit retailer as the dual-purpose structure helps deter encroachment. Counterintuitively, we find that consumer surplus in the case of a dual-purpose retailer can be lower than that with a for-profit retailer. This is because the commitment to be a dual-purpose retailer reduces supplier encroachment and thus reduces the total quantity sold to consumers.

Managing Cost Reduction Efforts in Supplier Encroachment

The extant literature has indicated that upstream supplier encroachment on the incumbent retailer could be beneficial to the supplier, the retailer, and the entire industry, when the supplier’s marketing disadvantage satisfies specific conditions. This study extends the previous investigations about supplier encroachment to the circumstance where the supplier is capable of managing and mitigating her marketing disadvantage, which further intensifies the retail competition and provides new managerial implications about the encroachment. We find that encroachment with cost reduction efforts does not necessarily hurt the retailer and the industry but always benefit the supplier and consumers. Compared to encroachment without the cost reduction effort, encroachment with cost reduction efforts does not necessarily benefit the supplier and the industry. Between encroachment with and without cost reduction efforts, the retailer and consumers always prefer the latter and the former, respectively. Our findings provide meaningful insights to manage cost reduction efforts in supply chain encroachment.

Supplier Encroachment in a Nonexclusive Reselling Channel

We consider a setting in which a nonexclusive reseller procures partially substitutable products from two suppliers, one of whom introduces a direct channel. We find that the presence of the second supplier alters many of the existing results about the interactions between a reseller and an encroaching supplier. For instance, the reseller’s and the supply chain’s benefit from the direct channel disappears when the product substitutability is sufficiently large. In addition, when the reseller is nonexclusive, the encroaching supplier may either sell exclusively through its direct channel even when that channel is less efficient than the reselling channel, or sell through both channels even when its direct channel is more efficient than the reselling channel. Neither of these would occur in an exclusive reselling environment with only one supplier. This paper was accepted by Jayashankar Swaminathan, operations management.

The impact of quantity-based cost decline on supplier encroachment

We study a supply chain in which a supplier with encroachment capability and quantity-based cost decline sells through a retailer with demand information advantage. By solving a signaling game, we find that cost decline increases the possibility of order distortion. The obtained results also show that without encroachment, both supply chain members are better off from cost decline; with encroachment, cost decline always hurts the retailer and benefits the supplier only if the direct selling cost is not very high. In addition, encroachment benefits the supplier when the direct selling cost or the cost decline efficiency is relatively low, while benefits the retailer when the direct selling cost is sufficiently high. Finally, we discuss on different information structures and obtain some information management insights.

Supplier Encroachment, Marketplace and Counterfeiting

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.

Disclosure Delegation and Supplier Encroachment

Disclosure Delegation and Supplier Encroachment

Control of Direct Sales Channel and the Implications for Supplier Encroachment

While it has been widely recognized that a supplier's direct sales activities can have a significant impact on its interactions with a reseller, little attention has been paid to the fact that many suppliers can sell directly only by accessing consumers through an agency platform that collects commissions and fees. Because these agencies are often controlled by independent third parties or even the resellers themselves, we investigate how the control of the agency impacts the interactions between the supplier and a reseller. We find that when the agency is controlled by either a third-party or by the reseller, the effects of supplier encroachment are dramatically different than when the supplier can sell directly on its own. When the supplier can sell directly only by paying a commission to an independently operated agency platform, there is no longer a possibility that the total supply chain profit can be reduced when the supplier sells a positive quantity directly. For an intermediate range of direct selling cost, the supplier, the reseller, and society as a whole are better off when the supplier must rely upon an independently operated agency platform than when the supplier can sell directly without paying a commission. We also find that if the agency platform is controlled by the reseller to whom the supplier sells her product, this can discourage the supplier from developing direct sales capability unless the reseller either decentralizes his agency and reselling operations or is able to commit to the transaction fee in the agency channel.

Partial outsourcing from a rival: Quality decision under product differentiation and information asymmetry

Firms along with producing components in-house source some requirements from a supplier competing in the downstream market (encroachment). However, the supplier may strategically choose not to compete with the manufacturer (no-encroachment). In a stylized game-theoretic model, we characterize component quality decisions of the supplier, a two-part tariff contracting structure, and the market output decisions of both players. We focus on investigating the effect of product quality differentiation and partial outsourcing strategy on the above decisions. We find that product quality may increase or decrease with the increase in product differentiation. Further, we find that the increase in the fraction of requirements outsourced by the manufacturer to the supplier may increase or decrease the product quality. Later, our analysis reveals that when a manufacturer’s in-house quality cost is very low, or the degree of product differentiation is in the moderate range, the supplier encroachment could lead to a “win-win” outcome for both players

Strategic information sharing in a supply chain under potential supplier encroachment

This paper considers strategic information sharing in a two-echelon supply chain under potential supplier encroachment. Different from the literature about ex ante information sharing, in which a retailer commits to sharing before observing any information, we investigate ex post sharing after the content of information becomes known. Conventional wisdom suggests that, compared with a single channel, a retailer should disclose less information to the supplier due to competition from encroachment. However, we find a different result, namely, that the retailer’s information sharing threshold does not alter regardless of whether the supplier encroaches. The threshold depends only on the retailer’s information acquisition capability and the demand distribution. We demonstrate that the retailer is not willing to obtain a perfect information acquisition capability even when the acquisition is costless. The retailer’s profit exhibits a non-monotonic relation to his information acquisition capability. However, both the supplier’s profit and her encroachment incentive exhibit positive relations with the retailer’s information acquisition capability. In addition, we show that supplier encroachment not only benefits the supplier but may also benefit the retailer and the whole supply chain. Additionally, the supplier is more likely to encroach under a larger production diseconomy and a lower selling cost.

Should a retailer sell its own extended warranties or resell those from the manufacturer when confronting supplier encroachment?

Due to fierce competition in the product market under conditions of supplier encroachment, many brand name retailers, including Sears, Best Buy, and Circuit City, depend on the extended warranty contracts that they sell along with the products. The distribution of extended warranties through an intermediary can be characterized in terms of two basic forms. A large proportion of retailers sell their own extended warranty, whilst others choose to resell the extended warranty provided by upstream agents. Several questions arise from these conditions. How will optimum decisions vary under different strategic choice? Is it profitable for a retailer to engage in selling extended warranties? And finally, which strategy is more profitable for related players? We answer these questions using a game theoretic model where the retailer has the flexibility to choose between offering its own extended warranties (Model ER) or reselling extended warranties provided by a manufacturer (Model EM). Our analysis reveals that it is indeed a profitable business for both parties when the retailer engages in selling extended warranty, irrespective of whether they are owned by the retailer or by the manufacturer. Surprisingly, we find that, when marketing cost of the extended warranty is high, the retailer benefits more from reselling the extended warranty, a strategy that is always beneficial for the manufacturer. Put differently, when marketing cost of the extended warranty is high, reselling extended warranties from the manufacturer can secure Pareto improvements. However, when marketing cost of the extended warranty is not pronounced, a preference confliction arises between both parties: The retailer prefers to sell its own extended warranty, while the manufacturer would be fond of the other one. Extending both models to the case where the manufacturer encroaches into retail market with selling both products and extended warranty reveals that the preference confliction between both parties is quite robust.

Decision policies on players’ different risk combination under supplier encroachment

Literature concerning about the supply chain management problem is usually based on perfect rationality. However, risk preferences have been proved to be an important role which influences managers’ decisions significantly. This paper investigates a risk combination problem under supplier encroachment with different risk preferences players. Assuming that the supply chain players may be risk-averse, risk-neutral and risk-taking, we build a Stackelberg game model to explore the optimal decisions and the impact of different risk combinations, respectively. We focus on two scenarios: the consumers perceive uniform quality between the two channels and perceive differentiated quality between the two channels. We find that the retailer always prefers a risk-averse supplier, while the supplier always prefers a risk-taking retailer. But the combination of a risk-averse supplier and a risk-taking retailer is not always beneficial to the whole supply chain. Further, we conduct numerical experiments to explore the risk combinations and the impacts of players’ selfish, aggressive and altruistic behaviors on optimal decisions.

Inducing Supply Chain Transparency through Supplier Encroachment

This study investigates a supplier’s voluntary disclosure strategy when it can encroach on a retailer’s operations by selling directly to final consumers. The establishment of a direct sales channel expands market potential, induces the supplier to adopt a more frequent disclosure strategy, and ultimately leads to a higher level of information transparency in the supply chain. Since more quality information is revealed in the presence of a dual channel, the retailer is able to free ride on the supplier’s disclosure to enhance consumers’ quality expectations. In most cases, such a free‐riding effect is positive and can even create a higher ex ante payoff for the retailer in face of the supplier’s encroachment. Conversely, more transparent product quality information does not necessarily benefit the supplier, who can then no longer hide negative quality information from consumers due to the potential change in the channel structure. Thus, we show that the supplier’s ex ante payoff may become lower with encroachment and that the supplier may commit not to encroach on the retail market, even when it has a free option to open a direct sales channel.

Supplier encroachment strategy in the presence of retail strategic inventory: Centralization or decentralization?

There has been extensive research on supplier encroachment. That is, a supplier sells to consumers through a direct retail subsidiary in addition to an independent retailer. However, most research assumes centralized encroachment, where the supplier makes decisions for the subsidiary. In this research, we make a major contribution by explicitly analyzing the option of decentralized encroachment, where the subsidiary makes its own pricing and/or quantity decisions. Furthermore, we make another major contribution by studying the retailer's possible use of strategic inventory as a countermeasure to achieve wholesale price concessions from the supplier. In a dual channel consisting of a retailer and a supplier and its subsidiary in a two-period model, we find that when the retailer can employ strategic inventory, decentralized encroachment outperforms centralized encroachment for the supplier and the retailer. Moreover, if the supplier adopts the strategy of decentralized encroachment, the retailer's use of strategic inventory always benefits the supplier, but it benefits the retailer only when the unit inventory holding cost is below a threshold. We also conduct numerical examples to further illustrate our analytical findings and gain more managerial insights.

A perspective on supplier encroachment in the era of e-commerce

Abstract The rapid development of e-commerce has created unprecedented opportunities for easy and vast access to customers. A by-product of this trend is that many suppliers have encroached upon the retail market by establishing their own online channels with which they can sell products directly to final consumers. Conventional wisdom suggests that supplier encroachment is detrimental to the incumbent retailer and may go against the improvement of system performance overall. In an earlier paper, we derived conditions under which supplier encroachment may lead to a “win-win” outcome for the supplier and the retailer and thus improve system profit. This is contingent upon the sales efficiency of the online channel, the supplier's channel power, and how much benefits the online channel can obtain from the retail channel due to service spillovers. These findings can be further verified by considering key elements such as market uncertainty, multi-sourcing, and capacity constraints.

Supplier Encroachment with Complementary Inputs

We examine the incentives and implications of supplier encroachment, when production of the final product requires multiple complementary inputs and each firm is specialized in the production of one input. Entry of a supplier into the final product market gives rise to cross-supply of inputs. We show, contrary to conventional views, that encroachment can increase wholesale prices and can reduce consumer surplus. We also show that encroachment can be beneficial both for the entrant and the incumbent, even when they are equally efficient and move simultaneously in the final product market and there are no prior investments in sales effort or cost reduction. The model yields novel managerial, empirical and policy implications.

Strategic Contracting and Supplier Encroachment Through an E-commerce Platform

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.

Adding clicks to bricks: An analysis of supplier encroachment under service spillovers

Abstract The rapid development of e-commerce has been witnessing many suppliers’ introducing Internet channels by which products are directly sold to consumers. In this paper, we investigate whether or not a monopolistic supplier should encroach on the market by introducing an Internet channel, and how supplier encroachment affects the retailer and system performance under service spillovers and different channel power. Four models are discussed: the supplier/retailer acts as the Stackelberg game leader in the setting with and without supplier encroachment, respectively. The results show that when the supplier acts as the Stackelberg leader, he encroaches on the market if and only if the selling cost of the Internet channel is sufficiently small. Contrary to common wisdom, the retailer benefits from supplier encroachment and therefore resulting in a Pareto improvement under strong service spillovers. When the retailer behaves as the Stackelberg leader, she will definitely suffer under supplier encroachment and the Pareto improvement vanishes. Interestingly, the supplier encroaches on the market only when the service spillovers are very weak and the selling cost is small. We further examine how supplier encroachment reshapes the retailer’s preferences for channel power and reveal that the strategic abandon of the first-moving position might be profitable to her, especially when the supplier’s selling cost is sufficiently low and the service spillovers are strong.

Risky Supplier Encroachment and Reliability Investment Spillover

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.

Strategic Inventory and Supplier Encroachment

Problem definition: In a two-period model of a dyadic supply chain, we study the interaction between the use of strategic inventory withholding by the buyer and the use of a direct selling channel (encroachment) by the supplier in the second period. Academic/practical relevance: While the extant OM literature has individually examined the two strategies, the system-wide combined effect of these strategies has not been studied. Methodology: We fill the gap by building and analyzing two decentralized models of vertical competition. The main model focuses on sequential quantity decisions where the buyer decides on its order quantity and sets its selling quantity, with a first-mover advantage, before the supplier decides on its direct selling quantity. In an extension, we also consider an alternative timing structure of simultaneous quantity competition. Results: For the sequential model, we find that for any finite holding cost, the buyer may withhold strategic inventory in certain cases. This makes the supplier less aggressive in using its direct selling strategy compared to the case when strategic inventory is not an option. Moreover, there exist situations where both the supplier and the buyer make higher profits from the combined use of their respective strategies at the same time. For the simultaneous model, the buyer can achieve higher profit than in the sequential model in certain scenarios. However, the supplier’s profit may drop below the benchmark case (when neither strategic inventory nor direct selling is present), which is not seen in the sequential model. As such, the buyer can benefit from losing its first-mover advantage, whereas the supplier may be worse off. Managerial implications: Our study provides useful managerial insights into the strategic (joint) moves of the players in a supply chain. We show that both the supplier and the buyer can benefit from vertical competition. Moreover, the first-mover advantage may not always increase profits for the players.

To Have Your Cake and Eat It? A Two-Period Model for Retailers’ Mixed Bundling or Reserved Product Pricing Strategies in Response to Supplier Encroachment

In practice, many brand products retailers have adopted mixed bundling (MB) and reserved product pricing (RPP) in response to external competition, such as supplier's encroachment. There is scanty literature which addresses such flexibility among retailers and its impact on a dual-channel supply chain. To fill this void, we considered a two-period dual-channel model in which one of the two manufacturers sells a product through a direct channel; and through an independent retailer who can bundle two manufacturers' products together (Model M) and reduce their reservation prices (Model R). Our central result demonstrates that, although both MB and RPP strategies can indeed improve retailer's profitability, MB strategy creates strategic issues that are significantly different from that of RPP strategy. More specifically, relative to MB strategy, the retailer's RPP strategy is always detrimental to the manufacturer. Finally, to avoid the retailer's strategic choice for RPP, we designed a revenue sharing contract which can achieve perfect coordination of the supply chain ecosystem.