Supplier Encroachment and Consumer Welfare: Upstream Firm's Opportunism and Multichannel Distribution

37 Pages Posted: 25 Sep 2016 Last revised: 21 Sep 2018

See all articles by Cong Pan

Cong Pan

Kyoto Sangyo University-Faculty of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 10, 2018

Abstract

I revisit supplier encroachment under the framework of a two-part tariff contract. When a monopoly manufacturer supplies competing retailers and each retailer's contracting process is unobservable to the rival, the retailer's lack of knowledge vis-à-vis its rival's contract may undermine the manufacturer's commitment power, which prevents the manufacturer from achieving optimal profit. I demonstrate that when the manufacturer directly supplies the retail market, it can use the direct channel as a commitment tool and thus restore its market power. Even though the manufacturer's encroachment creates more competitors in the retail market, the resultant higher wholesale prices cause significant loss in the indirect channel, which may reduce consumer welfare in equilibrium. Moreover, the efficiency enhancement of the manufacturer's direct channel can be detrimental to consumer welfare. These results hold even when the manufacturer is very efficient in direct selling.

Keywords: channels of distribution; encroachment; two-part tariff contract; supplier opportunism; consumer welfare

JEL Classification: L14, L22, M11

Suggested Citation

Pan, Cong, Supplier Encroachment and Consumer Welfare: Upstream Firm's Opportunism and Multichannel Distribution (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=2840667 or http://dx.doi.org/10.2139/ssrn.2840667

Cong Pan (Contact Author)

Kyoto Sangyo University-Faculty of Economics ( email )

Motoyama, Kamigamo, Kita-ku
Kyoto, Kyoto 603-8555
Japan

HOME PAGE: http://https://sites.google.com/site/pancongecon/

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