Control of Direct Sales Channel and the Implications for Supplier Encroachment

Abstract

While it has been widely recognized that a supplier's direct sales activities can have a significant impact on its interactions with a reseller, little attention has been paid to the fact that many suppliers can sell directly only by accessing consumers through an agency platform that collects commissions and fees. Because these agencies are often controlled by independent third parties or even the resellers themselves, we investigate how the control of the agency impacts the interactions between the supplier and a reseller. We find that when the agency is controlled by either a third-party or by the reseller, the effects of supplier encroachment are dramatically different than when the supplier can sell directly on its own. When the supplier can sell directly only by paying a commission to an independently operated agency platform, there is no longer a possibility that the total supply chain profit can be reduced when the supplier sells a positive quantity directly. For an intermediate range of direct selling cost, the supplier, the reseller, and society as a whole are better off when the supplier must rely upon an independently operated agency platform than when the supplier can sell directly without paying a commission. We also find that if the agency platform is controlled by the reseller to whom the supplier sells her product, this can discourage the supplier from developing direct sales capability unless the reseller either decentralizes his agency and reselling operations or is able to commit to the transaction fee in the agency channel.