Manufacturer encroachment and retailer demand information sharing in a supply chain with two-way free riding and advertising threshold effect

Abstract

This study examines a supply chain in which a manufacturer that is capable of market encroachment and advertising level adjustment sells products through a retailer that has a demand information advantage and can adjust retail service level. The manufacturer strategically decides whether to encroach, and the retailer decides whether to share demand information, by considering their two-way free riding and the advertising threshold effect (ATE). The results reveal that a high demand forecast variability incentivizes the retailer to send true demand signals to the manufacturer. If the manufacturer monopolizes the small market, even if the advertising threshold is low, the supply chain members cannot achieve a win–win outcome from encroachment when the advertising efficiency is low. If the manufacturer does not monopolize the small market, even if the advertising efficiency is low, the supply chain members can achieve a win–win outcome from encroachment when the direct selling cost lies within the low-to-medium interval, and the advertising threshold is not extremely high, particularly with demand information sharing. By weighing the losses from encroachment against the gains from demand expansion, the retailer chooses to share demand information for free riding from unconstrained advertising levels when the service spillover effect is strong. Moreover, demand information sharing does not always enhance consumer surplus and social welfare but can help the manufacturer and retailer achieve consensus on the sequence of selling quantity decisions. Finally, the ATE may have opposite effects on the manufacturer’s motivation to encroach and the retailer’s incentive to share demand information.