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Supplier Encroachment and Consumer Welfare: Upstream Firm’s Opportunism and Multichannel Distribution

Cong Pan

ISER Discussion Paper from Institute of Social and Economic Research, Osaka University

Abstract: I revisit supplier encroachment under the framework of a two-part tariff contract. When a monopoly manufacturer supplies competing retailers and each retailer’s contracting process is unobservable to the rival, the retailer’s lack of knowledge vis-à-vis its rival’s contract may undermine the manufacturer’s commitment power, which prevents the manufacturer from achieving optimal profit. I demonstrate that when the manufacturer directly supplies the resale market, it can use the direct channel as a commitment tool and thus restore its market power. Even though the manufacturer’s encroachment creates more competitors in the resale market, the resultant higher wholesale prices aggravate double marginalization, which may reduce consumer welfare. This result holds even when the manufacturer is very efficient in direct selling.

New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
Date: 2018-02
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1020

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