Supplier Encroachment Strategies on a Retail Platform With Strategic Consumers

ABSTRACT The paper examines the impact of quality differentiation and strategic customer behavior on supplier encroachment strategies in a two‐period supply chain. The supply chain consists of a supplier and a retail platform that not only resells products from the supplier but also offers agency selling, allowing the supplier to sell directly to its customers by charging a commission rate. We develop a Stackelberg game model to analyze the supplier's different encroachment strategies: No encroachment (Strategy ), encroachment through agency selling with a uniform product (Strategy ) or a quality‐differentiated product (Strategy ), and the interaction between the two selling channels. We derive the equilibrium wholesale and retail prices as well as the profit of each party and further analyze the impact of strategic consumer behavior and quality differentiation on the supplier's optimal encroachment strategy as well as the equilibrium outcomes. Our analysis shows that when the commission rate is low, Strategy is preferred if the differentiated product quality is sufficiently high and strategic consumers are more patient. Otherwise, strategy is preferred. In the presence of supplier encroachment, there exists a threshold such that the period‐1 wholesale price initially decreases and subsequently increases as the level of consumer patience increases, due to the co‐petition relationship between the supplier and the platform. In addition, the double marginalization effect is mitigated when strategic consumers exhibit low levels of patience, but intensified when consumer patience is high. We also demonstrate that Strategy can make the supplier, the retail platform, and consumers all better off when strategic consumers exhibit higher levels of patience.