Supplier Encroachment as an Enhancement or a Hindrance to Nonlinear Pricing

Production and Operations Management, Vol. 24, No. 1, pp. 89-109, 2015

40 Pages Posted: 27 Jul 2012 Last revised: 14 Jul 2015

See all articles by Zhuoxin Li

Zhuoxin Li

Boston College - Carroll School of Management

Stephen Gilbert

University of Texas at Austin - McCombs School of Business

Guoming Lai

University of Texas at Austin - Red McCombs School of Business

Date Written: July 26, 2012

Abstract

The objective of this paper is to extend existing understanding of supplier encroachment to contexts in which there is information asymmetry and the supplier can use nonlinear pricing. Prior research has shown that supplier encroachment can mitigate double marginalization and thus benefit both the supplier and the reseller. However, under symmetric information, this benefit disappears if the supplier can use nonlinear pricing. In our model, the reseller observes the true market size while the supplier knows only the prior distribution, i.e., a seemingly ideal setting for implementing mechanism design through nonlinear pricing. We first show that, because encroachment capability enables the supplier to make an ex-post output decision, it fundamentally alters the structure of the optimal nonlinear pricing policy. In addition to the usual downward distortion effect, where the reseller may purchase less than the efficient quantity, we also have the possibility for upward distortion. Thus, under asymmetric information and nonlinear pricing, supplier encroachment has two opposing effects. On one hand, the ability to shift sales to the direct channel allows the supplier to reduce information rents with less sacrifice of efficiency; but on the other hand, by introducing the possibility of her own opportunistic behavior, it can result in upward distortion of the quantities sold through the reselling channel, which is a new source of inefficiency. Depending upon the relative efficiency of the reselling channel and the demand distribution, either of these two effects may dominate and the supplier's ability to encroach may either benefit or hurt both the supplier and the reseller.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract= 2403615

Keywords: supplier encroachment, information asymmetry, nonlinear pricing

Suggested Citation

Li, Zhuoxin and Gilbert, Stephen and Lai, Guoming, Supplier Encroachment as an Enhancement or a Hindrance to Nonlinear Pricing (July 26, 2012). Production and Operations Management, Vol. 24, No. 1, pp. 89-109, 2015, Available at SSRN: https://ssrn.com/abstract=2118161 or http://dx.doi.org/10.2139/ssrn.2118161

Zhuoxin Li (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Ave
Chestnut Hill, MA Massachusetts 02467
United States

Stephen Gilbert

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Guoming Lai

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

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