۱- Introduction

۲- Literature review

۳- The model

۴- Analysis

۵- Extension: Alternative timing of quantity decisions

۶- Conclusion

References

Abstract

This paper investigates manufacturer encroachment with both endogenous quality decision and asymmetric demand information to examine the effects of encroachment and information structure on quality and profits for chain members. Manufacturer encroachment results in a signaling game where at equilibrium the retailer has to distort the order quantity downward under low market size. Our result shows that encroachment leads to a lower quality when the manufacturer’s direct selling cost is intermediate. The manufacturer always benefits from encroachment, and the retailer benefits from encroachment under an intermediate direct selling cost of the manufacturer since she can deter the manufacturer from selling directly to avoid channel competition. Results provide several information management implications. Compared to the full and no information cases, asymmetric information may increase quality when direct selling is relatively efficient while decrease quality otherwise. The manufacturer may prefer to keep information disadvantages when his direct selling cost is relatively large and the prior probability of large market size is high. Additionally, the informed retailer may be willing to share information to avoid the unexpected order quantity downward distortion in the case of asymmetric information when direct selling is efficient. As a result, the chain members reach a consensus on information sharing when the manufacturer’s direct selling cost is quite small or relatively large.

Introduction

The rapid development of e-commerce has enabled many manufacturers to build online channels and sell products directly to consumers, aside from the existing traditional channel where products are sold through a retailer (Tedeschi, 2000). Such phenomenon of manufacturers establishing online channels is usually termed as “manufacturer encroachment”, which has been observed in a variety of industries (Tannenbaum, 1995). For instance, a great deal of electronic product makers, e.g., Apple and HP, sell their products through both third-party retail stores and their own websites (Chen et al., 2017). Another example is in the apparel and fashion industry, manufacturers, such as Nike, Adidas, Coach, also develop dual-channel supply chains consisting of both direct and retail channels (Li et al., 2015). Manufacturer encroachment gives rise to channel competition between the upstream manufacturer and the downstream retailer. To manage these dual distribution channels successfully, different manufacturers have adopted a variety of strategies (Wang et al., 2017). In order to avoid potential channel conflict, manufacturers, such as Daimler, Nikon, and Rubbermaid, only use the online direct channel as a virtue showroom to provide users with product information and in-stock information of nearby retail stores without offering any products in the direct channel. In addition, as quality plays a paramount role in product design of a manufacturer (Jerath et al., 2017), different channel structures may be applied to different levels of product quality (Chen et al., 2017). A survey in 2014 indicated that 47% of 67 US sales channel managers held the opinion that opening a direct online channel is beneficial for product quality improvement (Forrester Research, Inc., 2014). In apparel industry, it is shown that the transition to a dual-channel setting with both retail and direct channels could allow a manufacturer to deliver a better quality product (Mount, 2013). As a result, a question naturally arises that will manufacturer encroachment always increase product quality.