Retail service investing: An anti-encroachment strategy in a retailer-led supply chain

Abstract Noting the rise of dominant retailers, we explore the retailer’s strategies to deter the manufacturer from encroaching in a retailer-led setting where the manufacturer keeps his own direct selling cost private. Our results show that the dominant retailer is always worse off while the manufacturer is always better off by manufacturer encroachment in a retailer-led supply chain when the fixed encroaching cost is negligible. This gives rise to a question that whether there exist effective anti-encroachment strategies for the retailer. We investigate a noted and prevailing strategy of retailers, retail service investing, to examine if it can help the retailer to prevent encroachment. Results show that the retail service level is reduced by encroachment. Retail service investing may actually be an effective anti-encroachment measure for the dominant retailer, especially when retail service investing is highly efficient and the retailer holds a great downward estimation deviation on the direct selling cost of the manufacturer. Retail service investing may lead to Pareto improvement for both the supply chain members and consumers. Additionally, the manufacturer may have incentives to share cost information with the retailer, depending on the retailer’s estimation deviation on the direct selling cost. Finally, we find that a prisoner’s dilemma may occur for a moderate fixed cost of encroachment.