Impact of Competition Type on a Competitive Manufacturer's Preference of Decision Timing

In this paper, we consider the impact of competition type (i.e., quantity competition vs. price competition) to study a manufacturer's preference for decision timing when she establishes the direct channel: she can choose to decide the retail price or quantity in the direct channel earlier than, concurrently with, or later than the retailer, when the manufacturer decides downstream encroachment and hence, becomes the existing retailer's competitor. We derive the competitive manufacturer's equilibrium outcomes and its most preferred decision timing in both quantity competition and price competition models. Intuitively, the competitive manufacturer may reduce the wholesale price to support the existing retailer's demand (referred to as the wholesale price effect hereafter) and use its direct-selling option to influence the existing retailer's decisions (referred to as the threat effect hereafter). However, we find this intuition might not hold because the pronounced wholesale price effect and the retail threat effect will vary with the competition type and the manufacturer's decision timing. If the manufacturer makes decisions earlier than the existing retailer, the wholesale price effect even does not exist, regardless of the competition type. As to the threat effect, we find it vanishes if quantity competition is assumed and the manufacturer makes the quantity decision before the retailer, while it always exists if price competition is assumed. Consequently, the manufacturer prefers making the retail decision after the retailer if firms decide on the retail quantity and the existing retailer may have incentive alignment with the manufacturer regarding the decision timing. However, in price competition, the manufacturer prefers making the retail price earlier than the retailer and the existing retailer always has a conflict of interest, so their incentive alignment becomes impossible