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This study investigates a supplier’s voluntary disclosure strategy when it can encroach on a retailer’s operations by selling directly to final consumers. The establishment of a direct sales channel expands market potential, induces the supplier to adopt a more frequent disclosure strategy, and ultimately leads to a higher level of information transparency in the supply chain. Since more quality information is revealed in the presence of a dual channel, the retailer is able to free ride on the supplier’s disclosure to enhance consumers’ quality expectations. In most cases, such a free‐riding effect is positive and can even create a higher ex ante payoff for the retailer in face of the supplier’s encroachment. Conversely, more transparent product quality information does not necessarily benefit the supplier, who can then no longer hide negative quality information from consumers due to the potential change in the channel structure. Thus, we show that the supplier’s ex ante payoff may become lower with encroachment and that the supplier may commit not to encroach on the retail market, even when it has a free option to open a direct sales channel.

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I n this study, we investigate the supplier's encroachment incentive when it distributes the product through multiple retailers. We show that the number of enrolled downstream retailers plays a pivotal role in determining the supplier's encroachment incentive and the channel members' performances. There exists a threshold value with respect to the number of downstream retailers, below which the bright side of supplier encroachment documented in the existing literature exists; that is, encroachment can benefit not only the encroaching supplier itself but also the retailers. However, when the number of downstream retailers exceeds this threshold value, the further intensified downstream competition dampens the effect of wholesale price reduction arising from supplier encroachment. Supplier encroachment becomes always detrimental to the retailer. Moreover, with the increasing number of retailers, the supplier may become worse off when being endowed with the option of downstream encroachment, even when the supplier does not actually execute this option. We further investigate the supplier's optimal market penetration strategy when it can enroll a new retailer or open a direct channel, or it is costly to establish the indirect channel. We show that the main results remain qualitatively unchanged when the two selling channels are imperfect substitutes or retailers are asymmetric.