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The Bright Side of Supplier Encroachment

Author

Listed:
  • Anil Arya

    (The Ohio State University, Fisher College of Business, 2100 Neil Avenue, Columbus, Ohio 43210)

  • Brian Mittendorf

    (Yale School of Management, 135 Prospect Street, New Haven, Connecticut 06520)

  • David E. M. Sappington

    (University of Florida, Department of Economics, P.O. Box 117140, Gainesville, Florida 32611)

Abstract

The common wisdom is that a retailer suffers when its wholesale supplier encroaches on the retailer's operations by selling directly to final consumers. We demonstrate that the retailer can benefit from encroachment even when encroachment admits no synergies and does not facilitate product differentiation or price discrimination. The retailer benefits because encroachment induces the encroaching supplier to reduce the wholesale price in order not to diminish unduly the retailer's demand for the manufacturer's wholesale product. The lower wholesale price and increased downstream competition mitigate double marginalization problems and promote efficiency gains that can secure Pareto improvements.

Suggested Citation

  • Anil Arya & Brian Mittendorf & David E. M. Sappington, 2007. "The Bright Side of Supplier Encroachment," Marketing Science, INFORMS, vol. 26(5), pages 651-659, 09-10.
  • Handle: RePEc:inm:ormksc:v:26:y:2007:i:5:p:651-659
    DOI: 10.1287/mksc.1070.0280
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    References listed on IDEAS

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