Supplier encroachment with multiple retailers

Abstract

In this study, we investigate the supplier’s encroachment incentive when it distributes the product through multiple retailers. We show that the number of enrolled downstream retailers plays a pivotal role in determining the supplier’s encroachment incentive and the channel members’ performances. There exists a threshold value with respect to the number of downstream retailers, below which the bright side of supplier encroachment documented in the existing literature exists; that is, encroachment can benefit not only the encroaching supplier itself but also the retailers. However, when the number of downstream retailers exceeds this threshold value, the further intensified downstream competition dampens the effect of wholesale price reduction arising from supplier encroachment. Supplier encroachment becomes always detrimental to the retailer. Moreover, with the increasing number of retailers, the supplier may become worse off when being endowed with the option of downstream encroachment, even when the supplier does not actually execute this option. We further investigate the supplier’s optimal market penetration strategy when it can enroll a new retailer or open a direct channel, or it is costly to establish the indirect channel. We show that the main results remain qualitatively unchanged when the two selling channels are imperfect substitutes or retailers are asymmetric.