Supply chain encroachment with quality decision and different power structures

This paper studies a supply chain with manufacturer encroachment and different power structures where product quality is an endogenous decision. We investigate the effects of encroachment and power structure on quality and profits for chain members. Employing a game-theoretic approach, we find that, first, in a manufacturer-led supply chain, encroachment makes both manufacturer and retailer better off when the quality investment efficiency is relatively high. And, the manufacturer’s profit exhibits nonmonotonicity with respect to the extent of consumers acceptance on the direct channel in a retailer-led setting. Second, our result shows that the pure equilibrium outcomes are driven by the quality investment efficiency and the extent of consumers’ acceptance on the direct channel. An interesting result is that, for the manufacturer, establishing encroachment channel and occupying the leader position simultaneously are always not the optimal choice. Additionally, the options of encroaching and striving for leader position can lead to lose-win, win-win, and win-lose situations for the manufacturer and the retailer. Finally, a prisoner’s dilemma may occur with a low quality investment efficiency, a moderately fixed encroachment cost and a high extent of consumers’ acceptance on the direct channel when a fixed encroachment cost is considered.