Supplier Encroachment with a Dual-Purpose Retailer

Abstract

The development of e-commerce has greatly facilitated the practice that suppliers encroach upon the retail realm of downstream retailers through direct channels (e.g., online stores). The literature in this area has investigated profit-maximizing firms, but the role of other organizational structures is not well understood. This paper studies supplier encroachment in which the retailer is a dual-purpose corporation that pursues his own profit as well as consumer surplus. We find that the retailer's pursuit of consumer surplus can not only intensify market competition and thus reducing the margin of direct selling, but also motivate the encroaching supplier to set a higher wholesale price compared with the case of no encroachment, which is a contrast to the case of a for-profit retailer where encroachment lowers the wholesale price. The presence of a dual-purpose retailer reduces the effectiveness of using the wholesale price as a lever by the supplier. Therefore, encroaching upon a dual-purpose retailer can hurt the supplier. We examine whether a retailer can benefit from being a dual-purpose corporation and how the retailer's dual objectives affect consumer surplus. We find that a dual-purpose retailer can earn a higher profit than a for-profit retailer as the dual-purpose structure helps deter encroachment. Counterintuitively, we find that consumer surplus in the case of a dual-purpose retailer can be lower than that with a for-profit retailer. This is because the commitment to be a dual-purpose retailer reduces supplier encroachment and thus reduces the total quantity sold to consumers.