Navigating channel conflicts: dynamics of sales effort in manufacturer encroachment

Abstract In practice, manufacturers often lack accurate forecasts of product demand compared to retailers. When a manufacturer seeks to establish a direct sales channel, the retailer may leverage his demand advantage to obstruct this effort. This paper, for the first time, investigates the impact of a signal group—comprising order quantity and sales effort level—on the retailer's ability to manipulate information, employing a signaling game framework. We find that this signal group constrains the retailer's manipulation ability, thereby making it easier for the manufacturer to acquire demand information. Once the retailer can no longer prevent the manufacturer from establishing the direct channel, our analysis reveals that if the manufacturer shifts the sales effort cost burden onto herself, this strategy not only enhances the sales effort level, leading to increased product demand, but also mitigates channel conflict by reducing the retailer's resistance to the direct channel. Furthermore, when the manufacturer's direct sales cost is high, this cost‐shifting strategy can significantly increase the retailer's profit, creating mutual benefits for both parties in the supply chain.