This Article Full Text (PDF) References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via Google Scholar Google Scholar Articles by Arya, A. Articles by Sappington, D. E. M. Search for Related Content

The Bright Side of Supplier Encroachment

The Ohio State University, Fisher College of Business, 2100 Neil Avenue, Columbus, Ohio 43210
Yale School of Management, 135 Prospect Street, New Haven, Connecticut 06520
University of Florida, Department of Economics, P.O. Box 117140, Gainesville, Florida 32611
arya{at}cob.osu.edu
brian.mittendorf{at}yale.edu
sapping{at}ufl.edu

The common wisdom is that a retailer suffers when its wholesale supplier encroaches on the retailer's operations by selling directly to final consumers. We demonstrate that the retailer can benefit from encroachment even when encroachment admits no synergies and does not facilitate product differentiation or price discrimination. The retailer benefits because encroachment induces the encroaching supplier to reduce the wholesale price in order not to diminish unduly the retailer's demand for the manufacturer's wholesale product. The lower wholesale price and increased downstream competition mitigate double marginalization problems and promote efficiency gains that can secure Pareto improvements.

Key Words: channels of distribution; encroachment; market entry; retailing and wholesaling
History: Received: May 17, 2007;