The dark side of bilateral encroachment within a supply chain

Jiajia Nie, Qijun Wang, Chunlai Shi and Yu Zhou

Journal of the Operational Research Society, 2022, vol. 73, issue 4, 811-821

Abstract: It is broadly agreed that the opportunity of encroachment is a viable strategy to increase profit. We consider a supply chain in which one manufacturer can encroach by selling national brand products to consumers directly, and one retailer can encroach by developing and selling store brand products. The national brand product is more valued by consumers, whereas the incumbent retailing channel is more cost-efficient. Linear inverse demand functions are derived from consumer utility functions. We assume that two firms move simultaneously and separately to choose their strategies. We then identify the conditions under which each firm should encroach. We find that the strategic channel control role of direct marketing is eliminated by the retailer’s opportunity of encroachment; hence, the manufacturer should not establish the direct channel unless direct sales actually occur. Contrary to conventional wisdom, the analytical results demonstrate that under certain conditions the opportunity of bilateral encroachment can form a prisoner’s dilemma between the manufacturer and the retailer, i.e. the Pareto optimal solution is not to encroach, but encroachment is the optimal strategy for both firms. In addition, we find that the prisoner’s dilemma could be avoided by allowing one firm to move first to choose its strategy.

Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/01605682.2021.1880293 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:tjorxx:v:73:y:2022:i:4:p:811-821

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/tjor20

DOI: 10.1080/01605682.2021.1880293

Access Statistics for this article

Journal of the Operational Research Society is currently edited by Tom Archibald

More articles in Journal of the Operational Research Society from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().