On the effects of supplier encroachment under endogenous quantity leadership

Prior literature has shown that, for exogenously prescribed sequence of quantity decisions, supplier encroachment into a retailer’s market can mitigate double marginalization and thereby benefit both the supplier and the retailer. This study extends existing understanding of supplier encroachment to the contexts in which the Stackelberg leadership/followership preferences of the two firms are endogenous under exogenous and endogenous wholesale prices. In our model, the two firms can engage in one of the three quantity competition games: simultaneous game; sequential game with the retailer being the Stackelberg leader; and sequential game with the retailer being the Stackelberg follower. Accordingly, this study reexamines the effects of encroachment in tandem with the Stackelberg leadership/followership decisions of the two firms. Under exogenous wholesale price, either firm may choose the Stackelberg leader or follower role contingent on their relative operational costs. Under endogenous wholesale price, the supplier strategically relies less on wholesale price concessions to induce the retailer-as-leader sequential game as an equilibrium. In either scenario, encroachment always benefits consumers, but it cannot secure Pareto gains. Encroachment leads to either a “win-lose” or a “lose-lose” outcome for the supplier and retailer because endogenizing the Stackelberg leadership/followership preferences radically influences the interplay between the wholesale price effect and competition effect of encroachment. We find that the ineluctable need to cultivate the reselling channel is likely to cause the encroaching supplier to write a contingent contract characterized by per-unit wholesale markups and lump-sum slotting allowances (i.e., fixed transfer from the supplier to the retailer).