Supplier Encroachment and Investment Spillovers

Abstract

The conventional wisdom is that a manufacturer's encroachment into the retail space will likely hurt an existing retailer. In contrast to the conventional belief, the current research shows that a retailer may in fact welcome a manufacturer's encroachment despite of new competition in the final market. The encroachment may help the manufacturer have some "skin in the game" at the retail level which will get it to make a selfish cost-reducing investment that in turn spills over to the retailer. Such a spillover effect enhances the retailer's profit as long as the encroachment does not result in extreme retail competition. The spillover effect is so robust that the retailer's benefit from the encroachment remains even after considering potential mitigating factors such as a manufacturer's decentralized encroachment, additional retail competition, and price competition.

Keywords: Supply chains, Investments, Production cost, Competition, Supplier encroachment

JEL Classification: L13, L22, M31, A41