Adding clicks to bricks: An analysis of supplier encroachment under service spillovers

The rapid development of e-commerce has been witnessing many suppliers' introducing Internet channels by which products are directly sold to consumers. In this paper, we investigate whether or not a monopolistic supplier should encroach on the market by introducing an Internet channel, and how supplier encroachment affects the retailer and system performance under service spillovers and different channel power. Four models are discussed: the supplier/retailer acts as the Stackelberg game leader in the setting with and without supplier encroachment, respectively. The results show that when the supplier acts as the Stackelberg leader, he encroaches on the market if and only if the selling cost of the Internet channel is sufficiently small. Contrary to common wisdom, the retailer benefits from supplier encroachment and therefore resulting in a Pareto improvement under strong service spillovers. When the retailer behaves as the Stackelberg leader, she will definitely suffer under supplier encroachment and the Pareto improvement vanishes. Interestingly, the supplier encroaches on the market only when the service spillovers are very weak and the selling cost is small. We further examine how supplier encroachment reshapes the retailer's preferences for channel power and reveal that the strategic abandon of the first-moving position might be profitable to her, especially when the supplier's selling cost is sufficiently low and the service spillovers are strong.