Should supplier utilise a private direct channel? A contract mechanism

Purpose A supplier’s effort to establish a private direct channel creates transparency issues and conflicts within the distribution channel, potentially harming the retailer. This study proposes a contract mechanism design to address information asymmetry in supplier encroachment. Design/methodology/approach A principal-agent model is employed, wherein the retailer (principal) proposes a contract to the supplier (agent), consisting of an indirect price and a wholesale price. The supplier then selects a contract based on their private encroachment information and sets the direct channel price. The model is analysed under two schemes: full information (no private information) and incomplete information (supplier retains private direct channel information). Findings Under incomplete information, the retailer assumes the supplier possesses a direct channel, even when the supplier denies engaging in encroachment. Consequently, the retailer reduces the order quantity and the wholesale price, which increases the selling price but diminishes the untrusted supplier payoffs. Ultimately, the contract incentivises the supplier to establish and disclose their direct channel to the retailer. Practical implications This study provides a new perspective for retailers to identify and address suppliers’ private encroachment information through the use of a contract mechanism design. Originality/value The novelty of this study lies in its incorporation of asymmetric channel information, where the supplier may withhold information about their direct channel.