Strategic interactions in vertical supply chains: on the role of encroachment and advance purchasing

Abstract

This dissertation analyzes strategic interactions between an upstream seller and a downstream buyer in three two-period settings: (i) when the seller opens a direct channel in parallel to an existing indirect channel (aka seller encroachment); (ii) when the buyer may purchase advance units—as strategic inventory (SI) or forward units—to create supply-side competition between the seller and her advance units; (iii) when the consumers can sell their used products to a new cohort of consumers through a P2P platform. The first essay examines the impact of the seller’s manufacturing cost learning on his encroachment decisions. We find that cost learning can help reduce the manufacturing cost enough to make encroachment profitable for the seller, despite his additional direct selling cost. However, encroachment induces the buyer to lower her orders, adversely impacting cost learning, and hence, the manufacturing cost. As a result, encroachment, which typically benefits the seller, may hurt him in the presence of cost learning. Surprisingly, the seller still continues to encroach and sell directly unless he can credibly assure the buyer that he will not encroach. The second essay studies the role of forward contracting when the buyer can carry SI. Since forward units and SI have a similar effect on the future spot price, we show that forward contracting eliminates the buyer’s incentive to carry SI. We further reveal that it is always in the seller’s best interest to offer a forward contract, which also benefits the buyer. Although in equilibrium, the buyer never carries SI in the presence of a forward contract when the holding cost is sufficiently low, the buyer’s SI option distorts the forward contract, hurting all players; otherwise, the SI option has no impact on the players’ profits. The third essay considers the role of SI and forward contracting in the presence of a P2P platform. Earlier studies suggest that in the absence of a P2P platform, the seller raises the first period price to suppress the buyer’s SI, thereby limiting the buyer’s bargaining position in the second period. By contrast, we find that the competition from the P2P platform may induce the seller to encourage, rather than discourage, the buyer to purchase additional units in the first period by dropping the respective price. Further, the seller prefers offering a forward contract over letting the buyer carry SI, which may hurt the buyer.