Inviting An Entrant as A Survival Strategy to Fight Against Supplier Encroachment

Abstract

In practice, we have witnessed retailers inviting entrants to tackle the encroachment of their manufacturers. This study discusses the possible benefits of inviting entrants. We consider a model comprising one retailer and one manufacturer. The manufacturer decides whether to encroach or supply the retailer; The retailer decides whether to help a third-party firm overcome its entry barrier. Contrary to most existing models that assume the retailer to be more advantaged in retailing than the manufacturer, we allow the retailer to be either more or less advantaged. We show that whether firms compete in quantity or price, the manufacturer, in the presence of an entrant, may choose to supply the retailer even if the latter is less advantaged. This is because, in such scenario, the manufacturer treats the retailer as a strategic collaborator to either restrict the entrant's market share or alleviate the downstream competition. In other words, triggering the intra brand competition against the retailer may help the manufacturer perform better in the inter-brand competition against the entrant. On the other hand, the retailer may intentionally prompt entry to trigger inter-brand competition to avoid being foreclosed by the manufacturer and obtain a favorable procurement condition.

Keywords: supplier encroachment, dual marketing channels, downstream entry, inter-brand competition, intra-brand competition

JEL Classification: L13, M11, D43