Retailer voluntary investment against a threat of manufacturer encroachment

• Published in: Marketing letters Vol. 32; no. 4; pp. 379 - 395
• Main Authors: Hamamura, Jumpei, Zennyo, Yusuke
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.12.2021; Springer Nature B.V
• Subjects: Annual reports; Business and Management; Consumer protection; Consumers; Cooperation; Cost reduction; Deterrence; Direct selling; Investments; Marketing; Production costs; Retail stores; Suppliers; Supply; Supply chains; Technology; Voluntary; Supply chain management; Cost-reducing voluntary investments; Supply chain cooperation; Strategic encroachment deterrence; Manufacturer encroachment
• ISSN: 0923-0645; 1573-059X
• DOI: 10.1007/s11002-021-09575-7

To elucidate supply chain cooperation between a manufacturer and a retailer, this study examines a model in which the retailer makes voluntary investments to reduce the marginal production cost of the manufacturer. The manufacturer is allowed to introduce a direct selling channel in addition to the indirect channel through the retailer (i.e., manufacturer encroachment), which however dampens the retailers’ investment incentives. The retailer can leverage its voluntary investments as a means of deterring manufacturer encroachment. We demonstrate that manufacturer encroachment is strategically deterred when the retailer’s cost-reduction technology is sufficiently effective. This strategic encroachment deterrence encourages the retailer to invest more, but it narrows the variety of channels from which consumers can select. When the latter effect dominates the former effect, consumer surplus declines with strategic encroachment deterrence.