Encroachment Channel Selection When Retailer Has Private Information: Role of Quantity Leadership
Posted: 6 May 2020
Date Written: April 5, 2020
Abstract
We begin with a supplier (she) who wholesales to a retailer (he), and is considering to encroach into the retail market by opening an independent online/offline store to sell directly to consumers (a direct channel encroachment) or by selling directly to consumers through the online platform of her retailer on commission (a commission channel encroachment). Under the latter encroachment, the retailer may choose to share his private demand information with the supplier, but the supplier must pay the retailer commission fees proportional to her direct sales revenue. In contrast, under the direct channel encroachment, the supplier collects the entire sales revenue but incurs a channel operating cost. We investigate how does a party's role as a Stackelberg quantity leader affect the retailer's information sharing incentive and the supplier's encroachment channel selection. We show that under the commission channel, a quantity leader retailer always shares his demand information with the supplier; however, if the retailer is the quantity follower, he may have no incentive to share his demand information. As to the supplier's encroachment channel selection, we show that for any given commission rate, there exists an upper (lower, resp.) threshold direct channel operating cost, above (below, resp.) which the supplier encroaches via the commission (direct, resp.) channel regardless of who is the quantity leader. When the direct channel operating cost falls between these two thresholds, we have the following: if the commission rate is low, the supplier adopts the commission (direct, resp.) channel encroachment when the retailer is the quantity leader (follower, resp.), while when the commission rate is high, the exact opposite holds. Interestingly, we show that a more accurate demand signal does not necessarily improve the supplier's preference over the commission channel encroachment.
Keywords: supplier encroachment, direct channel, commission channel, information sharing, quantity leadership
JEL Classification: C61, M11, M20
Suggested Citation: Suggested Citation