Technical Report Supplier Encroachment and ConsumerWelfare : Upstream Firm’s Opportunism and Multichannel Distribution

Pan, Cong

1020pp.1 - 39 , 2018-02 , The Institute of Social and Economic Research, Osaka University
I revisit supplier encroachment under the framework of a two-part tariff contract. When a monopoly manufacturer supplies competing retailers and each retailer’s con-tracting 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 manufac-turer 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 ag-gravate double marginalization, which may reduce consumer welfare. This result holds even when the manufacturer is very efficient in direct selling.

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