Imperfect Demand Information Sharing Under Manufacturer Encroachment

The dual-channel structure resulted from manufacturer encroachment could alter the incentives of downstream retailer to ex ante communicate demand forecast. And different types of channel competition need to be investigated in this dual-channel information sharing scenario. This paper aims to investigate retailer’s ex ante imperfect demand information sharing strategy given that upstream manufacturer has set up direct sales channel (manufacturer encroachment). The imperfect information sharing means the demand information shared is uncertain and has some error relative to the real-world demand condition. It examines two types of channel competition: quantity competition and price competition. Additionally, this study discusses the encroaching manufacturer’s incentives for adjusting channel substitution. The paper adopts a stylized game theoretic model to describe interactions between retailer and the encroaching manufacturer. Contrary to conventional wisdom, the paper shows that under manufacturer encroachment, it is always possible for ex ante demand information sharing. Specifically, in the Cournot competition scenario where retailer channel and the encroaching manufacturer direct channel compete in quantity, the encroaching manufacturer could encourage demand information communication through side payment. Furthermore, in the Bertrand competition scenario, retailer may voluntarily share demand information. In addition, in either quantity or price competition, the encroaching manufacturer has incentives to adjust channel substitution for profit maximization.