Manufacturer's encroachment strategy with substitutable green products

doi:10.1016/j.ijpe.2021.108102

International Journal of Production Economics

Volume 235, May 2021, 108102

https://doi.org/10.1016/j.ijpe.2021.108102 Get rights and content

Highlights

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This paper studies a manufacturer's two possible encroachment strategies: centralization and decentralization.
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It focuses on decentralized encroachment, a common business practice but rarely studied.
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It considers product competition and consumer green awareness.
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It shows the manufacturer can benefit from decentralized encroachment.
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It shows decentralized encroachment can improve the environmental performance and social welfare for the supply chain.

Abstract

This paper investigates a dual-channel supply chain where a manufacturer sells substitutable green products to its downstream subsidiary as well as an independent retailer. Most research in the literature assumes centralized encroachment, where the manufacturer makes all decisions for the subsidiary. In this paper, we make a major contribution by considering decentralized encroachment, a business practice where the subsidiary decides on pricing and/or quantity to maximize its own profit. We make another contribution by considering competition and consumer's green awareness. Our major findings are as follows. First, compared with centralized encroachment, decentralized encroachment is more beneficial to the manufacturer, but it makes the retailer worse off. Second, a profit-sharing contract can be employed between the manufacturer and its downstream subsidiary so that the both can benefit from the decentralized encroachment strategy. Third, under either centralized or decentralized encroachment, consumer's higher green awareness always benefits the manufacturer as well as the retailer. As product substitutability increases, the manufacturer will always benefit while the retailer can benefit only when the direct selling cost exceeds a threshold. Fourth, the manufacturer's decentralized encroachment can also improve the environmental performance and social welfare for the supply chain. Finally, we conduct numerical experiments to further illustrate our analytical findings and gain more managerial insights.

Introduction

In recent years, due to environmental concerns, sustainable development has attracted more and more public attention. Taking more environmental responsibility is an effective way for firms and their supply chains to build a better public image and gain competitive edge. Moreover, with the continuous development of e-Commerce and mobile technologies, online purchasing has long become mainstream. For example, the US retail e-commerce sales amounted to over 160.33 billion dollars in the first quarter of 2020, which is approximately 10% of the total retail sales and 5% of the annual e-commerce sales. As market leaders, Amazon and eBay are notable examples of online-based companies in US (Clement, 2020). For another example, China's e-commerce sales revenue reached 6.3 trillion RMB in 2017 and will exceed 11 trillion RMB by the end of 2020. The revenue of Alibaba Group, China's e-commerce giant, reached 509.7 billion RMB in financial year 2020 (Statista Research Department, 2020). Hence, manufacturers of green products are selling their products through online direct channels along with offline third-party retailers. As an example of green manufacturing in the mobile phone industry, Nokia uses materials with no toxic flame retardants to produce mobile phones and accessories and then sells them through both retailers and their own physical/online stores (Patra, 2018). Haier is another example of green manufacturers, who supplies a series of green products, i.e., air conditioners and washing machines, to customers through his own direct channel and independent retailers (Yang et al., 2019).

The introduction of direct channels can result in conflict and competition between a manufacturer and her independent downstream retailers. This phenomenon is often referred to as manufacturer encroachment (Li et al., 2015). The encroachment allows the manufacturer to create new markets across multiple channels (Tsay and Agrawal, 2004) and promote brand awareness and loyalty. Most of the existing literature concentrates on centralized encroachment (CE), where a manufacturer centrally makes all decisions (e.g., pricing) for her subsidiary direct sales channel. However, in business reality, many manufacturers have adopted the strategy of decentralized encroachment (DE) by granting decision-making power to her retail subsidiaries. For example, in 2006, Sony Corporation established StylingLife Holdings, a holding company for Sony's group of retail businesses with the intention of enabling the independent management of these retail businesses with their own management and employees (Sony Corporation, 2006). In the context of e-commerce, a number of outdoor companies, such as Timbuktu, Teva, Merrell and GoLite, have set up their own online stores to expand retail business. In order to better respond to end market changes, these online stores are given more and more retail decision-making power in promotions, discounts and accounting (Li et al., 2020b). As a matter of fact, CE often faces multiple challenges, such as the inflexible intracompany trade and excessive competition between the players (Kalnins, 2004). To address these concerns in dual distribution, DE with a transfer price between a manufacturer and her downstream subsidiary has been advocated to alter the nature of dual-channel interactions (Alles and Datar, 1998). Arya et al. (2008) demonstrate that a manufacturer can benefit from DE by charging a transfer price above marginal cost to her downstream subsidiary.

Our research roots in the green manufacturing industry, also known as environmentally conscious manufacturing industry, where manufacturer produces green products with high resource efficiency and low negative environmental impacts. However, most of the existing literature in manufacturer encroachment (CE or DE) focuses on channel competition without considering product greenness. To address this gap, in this research, we focus on manufacturer encroachment in the presence of substitutable green products. As governments adopt various regulations to improve product eco-friendliness, more and more manufacturers have devoted attention to environmental responsibilities and green products (Kumar et al., 2014; Bian et al., 2020). Moreover, consumer green awareness also strongly incentivizes manufacturers to invest in green innovation. However, the extant literature on manufacturer encroachment typically omits consumer green awareness. This paper fills this research gap by studying manufacturer's encroachment strategy (CE vs. DE) with the consideration of both consumer green awareness and product substitutability. Specifically, in this research, we build a Stackelberg game model for a two-echelon supply chain with a manufacturer and a retailer. The manufacturer produces green products and can directly sell them to environmentally conscious consumers through her retail subsidiary, which may be centralized or decentralized with the manufacturer. And the subsidiary competes with the retailer by selling substitutable products. Our research objective is to investigate the impacts of consumer green awareness and product substitutability on the profitability and social welfare in the presence of manufacturer encroachment. Our primary research questions are as follow:

(1)
Should the DE or CE strategy be adopted by the manufacturer when the encroachment cost is sufficiently low?
(2)
Compared with the CE strategy, does the DE strategy lead to higher profit for the manufacturer and the retailer and higher environmental performance and social welfare?
(3)
Do consumer green awareness and product substitutability positively impact the profits of the manufacturer and the retailer?

This paper contributes to the literature in the following two ways. First, in terms of modelling, we contribute to the dual-channel literature by incorporating consumer green awareness and product competition into game-theoretic models of manufacturer encroachment. Our analytical results show that the manufacturer as well as the retailer can benefit from consumer's higher green awareness. As the product substitutability increases, the manufacturer can always benefit, but the retailer can benefit only when manufacturer encroachment is costly. Second, unlike most existing studies considering CE only, this paper contributes to the literature by being a first to allow the manufacturer to choose between CE and DE. Our main findings reveal that compared with CE, DE is more profitable for the manufacturer. In addition, DE can also benefit the environmental performance and social welfare for the whole supply chain. Third, by establishing an appropriate profit-sharing contract between the retail subsidiary and the manufacturer, the DE strategy can benefit the subsidiary as well.

The rest of this paper is organized as follows. Section 2 reviews the relevant literature. Section 3 introduces the basic assumptions and supply chain models where a manufacturer may adopt CE or DE. In Section 4, we identify and compare the equilibrium outcomes under CE and DE. Numerical studies are conducted in Section 5. Finally, Section 6 concludes the paper and suggests several future research directions. For clarify, all key proofs in this paper are provided in the appendices.

Section snippets

Literature review

Our work is related to three research streams of literature: green supply chain management, manufacturer encroachment and dual-channel supply chains.

The first stream of the literature mainly concentrates on the operational issues of green supply chain management (GSCM). The most related ones consider consumer's green awareness or/and competition. Consumer green awareness is in general viewed as the consumer's willingness to pay higher prices for environmental products (Chitra, 2007; Liu et al.,

Problem description and assumptions

We model dual-channel competition in a dyadic supply chain with one manufacturer (She) and one retailer (He). The manufacturer consists of an upstream manufacturing subsidiary and a downstream retail subsidiary. We focus on the impacts of consumer environmental awareness and production competition on the manufacturer's choice of encroachment strategy. The upstream manufacturing subsidiary provides differentiated green products, one for the downstream subsidiary and the other for the retailer

Equilibrium results and analysis

In this section, we will employ backward induction to derive and compare the equilibrium results under CE and DE. We also investigate the impact of consumer green awareness and product competition on each firm in the supply chain. We start with the CE strategy.

Numerical studies

In this section, we conduct numerical studies to examine the impacts of several key parameters such as consumer green awareness, $λ$ , and product substitutability, $k$ . Following the literature (e.g., Liu et al., 2012; Hong and Guo, 2019), we use the following parameter values: $a$ = 10, $h$ = 0.5 and $b$ = 3. It can be verified that these values satisfy the assumptions needed for our model (e.g., positive demand and profits). We first discuss the profits of the manufacturer and the retailer under CE and

Theoretical and managerial implications

In this section, several theoretical implications and managerial insights are proposed. First, our research is partly motivated by the increasing focus on environmentally friendly products from both consumers and businesses. More and more consumers have green awareness and higher wiliness to pay for green products. This fact yields a theoretical observation that consumer green awareness has a positive effect on the profitability of both the manufacturer and the retailer. Therefore, green

Conclusions

In this paper, we investigate a manufacturer's encroachment strategy in a dual-channel supply chain with substitutable green products. We make a major contribution by being a first to study the impacts of consumer green awareness and product substitutability on the manufacturer's choice between two possible encroachment strategies. The first strategy is centralized encroachment (CE), which is commonly assumed in previous studies. Under CE, the manufacturer centrally makes retail decisions for

Funding

This work was supported by the National Social Science Foundation of China under Grant No. 19BGL194.

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