Impacts of power structure and financing choice on manufacturer’s encroachment in a supply chain

This paper investigates the implication of three channel power structures (i.e., manufacturer-led, vertical Nash and retailer-led) on supply chain management in a setting where a manufacturer determines whether to introduce a direct sales channel and a retailer has two capital status (i.e., capital-constrained status or capital-sufficient status). The capital-constrained retailer faces the decision of financing by trade credit or bank credit. We find that compared to cooperating with a capital-sufficient retailer, cooperating with a capital-constrained retailer will make the manufacturer bear a higher encroachment cost. Surprisingly, the capital-constrained retailer choosing trade credit financing may deter the manufacturer’s encroachment behavior, which means that trade credit financing has a positive financing effect with manufacturer encroachment. However, bank credit financing always makes the retailer worse off after encroachment, and the positive trade credit financing effect achieves the most efficient performance under manufacturer-led structure, yet remarkably impoverished under retailer-led structure. In addition, although conventional wisdom suggests that the manufacturer will lower the wholesale price to boost retail channel’s demand with encroachment, we obtain a different conclusion by demonstrating that manufacturer encroachment has a negative wholesale price effect that the manufacturer will raise the wholesale price after encroachment to ensure that direct sales channel enjoys a price advantage in a Bertrand competition market. Interestingly, we find that retailer-led is the most conducive structure to manufacturer’s encroachment, and manufacturer-led is the most unfavorable structure for manufacturer’s entry except when the manufacturer cooperates the capital-sufficient retailer in a high-risk market. Furthermore, with the increase of channel competition/market risk/production cost, the manufacturer has less motivation to enter the market.