Manufacturer encroachment with a new product under network externalities

Jiaquan Yang, Kevin W. Li and Jun Huang

International Journal of Production Economics, 2023, vol. 263, issue C

Abstract: We study manufacturer encroachment in a two-echelon supply chain consisting of a manufacturer (her) and a retailer (him), in which she distributes a classic product through the retailer and endogenously determines whether to launch a new product with network externalities in a new direct sales channel. Analytical results show that the bar for the manufacturer to encroach with the new product is always lower than that for her to encroach with the same product and this bar can be further reduced by offering a more differentiated new product. We further establish that the retailer can be completely driven out of the market by encroaching with the new product, which is impossible under encroachment with the same product. Contrary to the conventional wisdom that the manufacturer should actively promote her new product under new-product encroachment, our research reveals that investing in enhancing the new product's network externalities can be detrimental to her profitability. Moreover, when the manufacturer cannot improve any of the following three factors to the right level, the strength of network externalities, direct sales channel efficiency, or product differentiation level, it is better for her to encroach with the same rather than new product. Counterintuitively, when network externalities are relatively weak and the direct sales channel is less efficient, the retailer prefers the manufacturer to encroach with the same rather than weaker new product.

Keywords: Supply chain management; Manufacturer encroachment; Product differentiation; Network externalities (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:263:y:2023:i:c:s092552732300186x

DOI: 10.1016/j.ijpe.2023.108954

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