Supplier and platform led games of supplier encroachment

Abstract

When adopting a dual-channel strategy, a supplier who initially provides the goods for an e-commerce platform’s reselling scheme typically has two direct-sale options: (i) retail channel encroachment by opening an independent store or (ii) commission channel encroachment through selling on the platform’s online marketplace. The supplier receives all retail revenue in the former but incurs a channel entry cost. In the latter, the supplier pays the platform commission based on the resulting sales revenue, and the platform may share its demand information with the supplier. We consider two quantity leadership structures: supplier-led and platform-led. First, we show that the platform employs a linear quantity decision rule in equilibrium when there is information asymmetry. Second, a quantity-leader platform always shares its information with the supplier via the commission channel, whereas a quantity-follower platform may not have any incentive to do so. Third, regardless of who the quantity leader is, the supplier always encroaches via the commission channel if the retail-channel entry cost is high and encroaches via the retail channel if that cost is low. Quantity leadership significantly impacts the supplier’s encroachment channel selection only when the retail-channel entry cost is moderate. In this situation, a quantity-leader supplier prefers retail (commission) encroachment, whereas a quantity-follower supplier prefers commission (retail) encroachment when the commission rate is low (high). Last, we consider an extended model that focuses on the simultaneous quantity competition game, and our results characterize the conditions where the supplier is less likely to choose the commission channel in a simultaneous game than in a sequential game.