Strategic pricing: An anti-encroachment policy of retailer with uncertainty in retail service

The development of e-commerce provides great convenience for suppliers to build a direct selling channel online, in response, retailers are aggressively seeking anti-encroachment methods for beating back their suppliers with potential encroachment incentive. This paper studies the effect of retailer’s strategic pricing on the supplier’s encroachment incentive. We build up an analytical model where the physical retailer rolls out retail service to attract consumers, while the matching degree between retail service and customers’ taste is uncertain before the selling season and could be privately observed by the retailer in the selling season. The retailer could strategically choose the pricing strategy between: (i) pricing before learning accurate consumer information (preannounced pricing) and (ii) pricing after grasping accurate information (responsive pricing). We find that responsive pricing can lead to costly signaling behavior for the retailer, in which the retailer downward distorts the profit margin when the realized service matching degree is low. Specifically, we demonstrate that strategically adopting responsive pricing could dampen the supplier’s encroachment incentive when signaling is costly and the matching degree is ex ante less likely to be high; otherwise, the retailer could strategically adopt preannounced pricing to dampen the supplier’s encroachment incentive. Our results suggest that the retailer’s strategic pricing could serve as a novel and costless anti-encroachment device.