Supplier Encroachment Through Online Marketplaces

Abstract

Currently, major online retail platforms, such as Amazon and JD, provide both conventional reselling channels and online marketplaces (i.e., agency channels), enabling their suppliers to encroach more efficiently than the traditional self-established direct channel. We construct a parsimonious model of a bilateral monopoly supply chain where the supplier can encroach through online marketplaces as both reselling and agency channels are available. Surprisingly, the encroachment option does not necessarily benefit the supplier. Unlike the traditional supplier encroachment literature, the supplier now always prefers simultaneous ordering, suggesting that more information can hurt the supplier. We further characterize the retailer’s channel offering strategy and identify a win-win region where both firms prefer encroachment (i.e., the hybrid mode). Our work provides a guideline for supplier encroachment in the era of dominant platforms and sheds light on its impact on vertical channel relationships.