Supplier Encroachment under Asymmetric Information

Abstract

Prior literature has shown that, for a symmetric information setting, supplier encroachment into a reseller's market can mitigate double marginalization and benefit both the supplier and the reseller. This paper extends the investigation of supplier encroachment to the environment where the reseller might be better informed than the supplier. We find that the launch of the supplier's direct channel can result in costly signaling behavior on the part of the reseller, in which he reduces his order quantity when the market size is small. Such a downward order distortion can amplify double marginalization. As a result, in addition to the "win-win" and "win-lose" outcomes for the supplier and the reseller, supplier encroachment can also lead to "lose-lose" and "lose-win" outcomes, particularly when the reseller has a significant efficiency advantage in the selling process and the prior probability of a large market is low. We further explore the implications of those findings for information management in supply chains. Complementing the conventional understanding, we show that with the ability to encroach, the supplier may prefer to sell to either a better informed or an uninformed reseller in different scenarios. On the other hand, as a result of a supplier developing encroachment capability, a reseller either may choose not to develop an advanced informational capability, or may become more willing to find a means of credibly sharing his information.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2340117

Keywords: direct and indirect channel, information asymmetry, supplier encroachment