Combat counterfeits effectively or not? Encroachment and financing strategies with production disruption risk

Abstract Counterfeits spur brand‐name supply chain to engage in manufacturer encroachment. Financial constraint disturbs encroachment strategies, especially with disruption risks. Developing an analytical model investigates how supply chain finance with production disruption risk affects encroachment strategy and its efficacy in combating counterfeits. We obtain optimal strategies for three scenarios: rich, moderately poor, and poor brand‐name supply chains. Encroachment strategies effectively combat counterfeits in rich and moderately poor brand‐name supply chains. The production disruption risk reduces the manufacturer's willingness to encroach, regardless of financial positions. Relative to rich brand‐name supply chains with encroachment, trade credit with risk‐free bank credit increases the manufacturer encroachment's likelihood, while it with costly bank credit reduces this likelihood. Financial cooperation through trade credit in moderately poor brand‐name supply chains effectively curbs counterfeiting. Even if bank credits are perfectly competitive, optimal strategies in poor brand‐name supply chains with encroachment depend on initial capitals, violating classical Modigliani‐Miller (M&M) theory.