Quality in Supply Chain Encroachment

Abstract

We study a supply chain with manufacturer encroachment in which product quality is endogenous and customers have heterogeneous preferences for quality. It is known that, when quality is exogenous, encroachment could make the retailer better-off. Yet when quality is endogenous and the manufacturer has enough flexibility in adjusting quality, we find that encroachment always makes the retailer worse-off in a large variety of scenarios. We also establish that, while a higher manufacturer's cost of quality hurts the retailer in absence of encroachment, it could benefit the retailer with encroachment. In addition, we show that a manufacturer offering differentiated products through two channels prefers to sell its high-quality product through the direct channel. Contrary to conventional wisdom, quality differentiation does not always benefit either manufacturer or retailer. Our results may explain why, despite extant theoretical predictions, retailers almost always resent encroachment. These findings also suggest that firms must be cautious when adopting quality differentiation as a strategy to ease channel conflict caused by encroachment.

Inducing Supply Chain Transparency through Supplier Encroachment

“…The result arises when the retailer possesses a selling cost advantage in the indirect channel, as encroachment induces the supplier to cut the wholesale price to maintain the retail channel demand and thus occasionally improves the retailer's payoff. Recently, Ha et al (2016) investigate supplier encroachment where product quality is endogenous and consumers have heterogeneous quality preferences. They find that encroachment is generally detrimental to the retailer but could benefit the retailer if and only if the cost of quality enhancement is high.…”

Decision policies on players’ different risk combination under supplier encroachment

“…We consider a supplier encroachment problem with a supplier (he) and a retailer (she), the supplier produces one product and sells to customers through the retailer and his own direct channel. To allow for the possibility that the retailer may be more efficient in retail operations than the supplier, we assume that the supplier incurs a per-unit selling cost c for each unit on direct channel and the selling cost of the retail channel is normalized to 0 [3,15,21]. On the demand side, we assume potential consumers with a total mass of one are heterogeneous in their valuation, δ, per unit of product quality, which we assume is uniformly distributed on [0, 1].…”

“…In this case, for any given price p for the product, the net utility of a consumer with valuation δ is δ − p. Therefore, all customers with δ ≥ p would buy the product. Hence demand is q = δ − p [15]. Without loss of generality, we normalize that the product's quality δ = 1.…”

“…In this case, we suppose the consumer's valuation through the retailer channel is δ and a valuation of θδ through the direct channel [8,9,15], where θ ∈ (0, 1], representing the consumers' acceptance of network, θ also can be interpreted as the intensity of competition between the two channels, and the bigger θ means the two channels are highly replaceable. When the price for the online channel is low enough relative to that for the retail channel, that is, θp r ≥ p s , both channels have positive demand.…”

Manufacturer product quality information disclosure with channel encroachment in the E‐commerce age

“…Though establishing a direct selling channel allows the manufacturer channel control and pricing flexibility (Tsay & Agrawal, ), its impact on the manufacturer's side is mixed. The manufacturer could be better or worse off with supplier encroachment, depending on market conditions (see, e.g., Arya et al, ; Li et al, , ; Ha et al, ). Nonetheless, when manufacturers conduct their own online businesses, they can avoid issues such as product return and webrooming (Hilken et al, ), by transmitting quality information to consumers in many ways, like advertisement in their online websites, famous bloggers' product experience reports published in online platforms, and investments in augmented reality technology (Smink et al, ).…”