Manufacturer encroachment in a vertically differentiated market with competing retailers and counterfeiter

Abstract This study investigates the encroachment strategy of a manufacturer with multiple competing retailers in the presence of a counterfeiter who produces an imitated product in a vertically differentiated market wherein the counterfeits and authentic products differ in quality. We derive some intriguing results that uncover the strategic effects among manufacturer encroachment, counterfeiting, and retailer competition. First, having the option to encroach may hurt the manufacturer himself but benefit the counterfeiter in the presence of competing retailers. Second, increased counterfeit similarity shrinks the beneficial encroachment region for the manufacturer but may widen the beneficial region for the retailer. However, the intensified retailer competition always shrinks the beneficial region for them. Third, the individual retailer's (manufacturer's) profit increases (decreases) with counterfeit similarity when the manufacturer chooses encroachment. Conversely, consumer surplus (social welfare) exhibits an inverted U‐shaped (U‐shaped) pattern with counterfeit similarity under encroachment threat. Moreover, the profits and welfare may jump with counterfeit similarity because of the change in the encroachment strategy wherein retailer competition alters the jump points.