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Supplier Encroachment and Consumer Welfare: Upstream Firm’s Opportunism and Multichannel Distribution

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  • Cong Pan

Abstract

I revisit supplier encroachment under the framework of a two-part tariff contract. When a monopoly manufacturer supplies competing retailers and each retailer’s contracting process is unobservable to the rival, the retailer’s lack of knowledge vis-à-vis its rival’s contract may undermine the manufacturer’s commitment power, which prevents the manufacturer from achieving optimal profit. I demonstrate that when the manufacturer directly supplies the resale market, it can use the direct channel as a commitment tool and thus restore its market power. Even though the manufacturer’s encroachment creates more competitors in the resale market, the resultant higher wholesale prices aggravate double marginalization, which may reduce consumer welfare. This result holds even when the manufacturer is very efficient in direct selling.

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  • Cong Pan, 2018. "Supplier Encroachment and Consumer Welfare: Upstream Firm’s Opportunism and Multichannel Distribution," ISER Discussion Paper 1020, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:1020
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    Cited by:

    1. Bisceglia, Michele & Padilla, Jorge & Piccolo, Salvatore & Shekhar, Shiva, 2022. "Vertical integration, innovation and foreclosure with competing ecosystems," Information Economics and Policy, Elsevier, vol. 60(C).
    2. Noriaki Matsushima & Tomomichi Mizuno, 2018. "Supplier encroachment and retailer effort," ISER Discussion Paper 1027, Institute of Social and Economic Research, Osaka University.
    3. Michele Bisceglia & Jorge Padilla, 2023. "On sellers' cooperation in hybrid marketplaces," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(1), pages 207-222, January.
    4. Noriaki Matsushima & Tomomichi Mizuno & Cong Pan, 2018. "A manufacturer's incentive to open its direct channel and its impact on welfare," ISER Discussion Paper 1026, Institute of Social and Economic Research, Osaka University.

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