Impact of competition type on a competitive manufacturer's preference of decision timing

In this paper, we consider the impact of competition type (i.e., quantity competition vs. price competition) to study a manufacturer's preference for decision timing when she establishes a direct channel: she can choose to decide the retail price or quantity in the direct channel earlier than, concurrently with, or later than the retailer. We derive the competitive manufacturer's equilibrium outcomes and its most preferred decision timing in both quantity competition and price competition models. We identify two effects when the manufacturer establishes the direct channel: the wholesale price effect, the manufacturer may reduce the wholesale price to support the retailer's demand, and the threat effect, the manufacturer uses the direct-selling option to influence the retailer's decision. We find that the wholesale price effect and the threat effect vary with the competition type and the manufacturer's decision timing. If the manufacturer makes the retail decision earlier than the existing retailer, the wholesale price effect even does not exist, regardless of the competition type. As to the threat effect, we find it vanishes if quantity competition is assumed and the manufacturer makes the quantity decision before the retailer, while it exists in price competition regardless of the decision timing. If the selling cost is low, the manufacturer has incentives to establish a direct channel and prefers making the retail quantity decision after the retailer in quantity competition, and the retailer and consumers may benefit from the manufacturer's decision. In price competition, the manufacturer prefers deciding the retail price earlier than the retailer, and consumers benefit from encroachment. However, contrary to the literature, we show that the retailer is worse off with encroachment.