Whether and how manufacturers encroach the market

Abstract Consider a manufacturer who has produced and sold a single product through a retail channel and now considers whether to open a direct channel to sell a product directly to customers. Upon deciding to encroach the market, the manufacturer needs to determine whether to offer the same product as available in the retail market (i.e. homogenized encroachment) or to offer a variant that has a better quality (i.e. differentiated encroachment). The interactions between the manufacturer and the retailer are modeled as the Stackelberg game models in which the manufacturer and the retailer act as the leader and follower, respectively. We show that when the product in the direct channel is slightly superior to that in the retail channel, differentiated encroachment can lead to greater manufacturer profit than either no encroachment or homogenized encroachment. On the contrary, when the product in the direct channel is sufficiently superior to that in the retail channel, the manufacturer is best to adopt either homogenized or differentiated encroachment strategy. Moreover, differentiated encroachment is not the retailer’s best choice in most cases. Finally, we find that from the view of social welfare, either differentiated or homogenized encroachment dominates no encroachment.