Manufacturer encroachment under distributional fairness concerns

Abstract Dominant retailers' squeeze results in very low profits for manufacturers in the traditional reselling channel, which raises manufacturers' significant concerns about profit fairness. This paper studies the manufacturer's encroachment strategy under fairness concerns by virtue of a game‐theoretical model, in which a manufacturer sells its products to a dominant retailer who resells them to consumers in the traditional reselling channel. Besides, the manufacturer can sell its products through a direct channel, i.e., manufacturer encroachment. The equilibrium solutions and profits under different scenarios are derived to check the interplay between fairness concerns and manufacturer encroachment. Some interesting results are obtained. First, fairness concerns can reduce the motivation of the manufacturer to encroach the market. Second, manufacturer encroachment always harms the retailer in the absence of fairness concerns, while it can benefit the retailer in the presence of fairness concerns. Third, the manufacturer's profit always decreases with the direct selling cost in the case without fairness concerns, while it may increase in the case with fairness concerns. These results obtained are robust when the decision timing or fairness concerns model is changed.