The Bright Side of Supplier Encroachment

Anil Arya; Brian Mittendorf; David E. M. Sappington

doi:10.1287/mksc.1070.0280

The Bright Side of Supplier Encroachment

Anil Arya¹; Brian Mittendorf²; David E. M. Sappington³

¹ The Ohio State University, Fisher College of Business, 2100 Neil Avenue, Columbus, Ohio 43210 · ² Yale School of Management, 135 Prospect Street, New Haven, Connecticut 06520 · ³ University of Florida, Department of Economics, P.O. Box 117140, Gainesville, Florida 32611

Marketing Science 2007

The common wisdom is that a retailer suffers when its wholesale supplier encroaches on the retailer's operations by selling directly to final consumers. We demonstrate that the retailer can benefit from encroachment even when encroachment admits no synergies and does not facilitate product differentiation or price discrimination. The retailer benefits because encroachment induces the encroaching supplier to reduce the wholesale price in order not to diminish unduly the retailer's demand for the manufacturer's wholesale product. The lower wholesale price and increased downstream competition mitigate double marginalization problems and promote efficiency gains that can secure Pareto improvements.

DOI: 10.1287/mksc.1070.0280
Volume: 26 (5)
Pages: 651-659
Language: en
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Sources: crossref