Direct or Indirect? Implications of the Retailer's Investment Choices on the Manufacturer's Encroachment Strategy

Abstract

Nowadays, retailer investment is becoming increasingly prevalent in real life. This paper focuses on a retailer's optimal investment strategy selection problem in a game model consisting of a manufacturer and a retailer. The manufacturer may establish a direct selling channel. For the same amount of money, the retailer has two investment choices: indirect investment through investing in upstream manufacturer's equity or direct investment through investing directly in its retail channel marketing. We compare the equity investment case and the channel investment case to identify the optimal investment decisions and investigate the behavior patterns of the manufacturer and the retailer in both cases. The following results are obtained. First, the equity investment can help deter or promote the establishment of a direct selling channel, depending on the manufacturer's equity shares held by the retailer and investment return. However, the channel investment is always an effective anti-encroachment measure for the retailer. Second, the retailer is not always worse off with encroachment in the case of equity investment because she can benefit more from the income from the equity investment. However, the retailer is always hurt by encroachment in the case of channel investment. Finally, the retailer's optimal investment strategy critically depends on the threshold value of fixed investment cost under equity investment case and channel investment case. The retailer can choose the optimal investment strategy by comparing these two threshold values. The investment approach with a larger threshold will be the best choice for the retailer. Our study furnishes valuable managerial insights into the retailer's optimal investment strategy.

Keywords: supply chain management, manufacturer encroachment, equity investment, channel investment, optimal investment strategy