Supplier Encroachment Strategy in the Presence of Retail Strategic Inventory: Centralization or Decentralization?

Abstract There has been extensive research on supplier encroachment. That is, a supplier sells to consumers through a direct retail subsidiary in addition to an independent retailer. However, most research assumes centralized encroachment, where the supplier makes decisions for the subsidiary. In this research, we make a major contribution by explicitly analyzing the option of decentralized encroachment, where the subsidiary makes its own pricing and/or quantity decisions. Furthermore, we make another major contribution by studying the retailer's possible use of strategic inventory as a countermeasure to achieve wholesale price concessions from the supplier. In a dual channel consisting of a retailer and a supplier and its subsidiary in a two-period model, we find that when the retailer can employ strategic inventory, decentralized encroachment outperforms centralized encroachment for the supplier and the retailer. Moreover, if the supplier adopts the strategy of decentralized encroachment, the retailer's use of strategic inventory always benefits the supplier, but it benefits the retailer only when the unit inventory holding cost is below a threshold. We also conduct numerical examples to further illustrate our analytical findings and gain more managerial insights.