The impact of partial vertical integration on supplier encroachment

The activity that upstream suppliers introduce online channel to sell products and compete with downstream offline retailers is referred to as “supplier encroachment”. Previous studies on this problem mainly focus on centralized and decentralized supply chain structures, while this paper considers partial vertical integrated supply chain. We establish a three-stage Stackelberg game model to analyze the impact of partial forward integration (PFI) and partial backward integration (PBI) on supplier encroachment, and find that in PFI, supplier encroachment always harms the retailer and results in two outcomes: win–lose or lose–lose. Specifically, when the equity and the direct-selling cost are large, the supplier’s optimal choice is to not encroach. In PBI, supplier encroachment may benefit the retailer and lead to four outcomes: win–lose, win–win, lose–lose, or lose–win. Here, when the equity is moderate and the direct-selling cost is low, encroachment will benefit both the supplier and the retailer. Furthermore, two extensions have been made to verify the robustness of our findings. We contend that the key results remain valid when considering channel substitution, while a new outcome of win–win in PFI arises when considering sequential quantity decisions.