How do fairness concerns influence a manufacturer's decision to compete with its own retailers? This paper investigates the manufacturer's encroachment strategy when retailers demand excessively low prices, impacting the manufacturer’s profitability. Using a game-theoretic model, the research analyzes a scenario where a manufacturer sells through a dominant retailer and also via a direct channel, examining the interplay between fairness considerations and market encroachment. The study explores the equilibrium solutions and profit outcomes under various conditions. Interestingly, fairness concerns can reduce the manufacturer's incentive to encroach on the market. While encroachment typically harms the retailer, the model reveals situations where it can benefit the retailer when fairness is a factor. Furthermore, the manufacturer's profit, which usually decreases with direct selling costs, may increase when fairness concerns are present. These findings provide valuable insights for manufacturers navigating channel relationships and strategic decisions. The results, robust across different models and decision timelines, shed light on the complexities of balancing profit maximization with fairness in distribution channels.
Published in Managerial and Decision Economics, this paper addresses strategic decision-making in competitive markets, a central theme of the journal. By examining the impact of fairness concerns on manufacturer encroachment, the study contributes to a deeper understanding of economic behavior and optimal strategies within distribution channels, relevant to managers and economists.