Online platform service investment: A bane or a boon for supplier encroachment

This paper investigates a platform service supply chain composed of a single supplier and a service platform that not only resells products but also may serve as an intermediary that connects the supplier to consumers directly. The service platform can improve the performance of the retail channel by investing in retail service. The supplier decides whether to encroach on the retail market by opening a direct channel on the platform. We analyze the interaction between the platform's service investment strategy and the supplier's encroachment decision by establishing a game model. We then compare the payoffs of the firms under different service investment strategies and find that the platform benefits from supplier encroachment in several cases. The benefit not only comes from the reduction of the double marginal effect but also from the share of profits that the supplier earns from the direct channel. A spillover effect can be observed in the platform's service investment. The spillover effect causes the increased profits generated by such investment to transfer to the supplier, ultimately resulting in that the service investment by the platform does not necessarily create more revenue for itself, but increases the supplier's profit. Results indicate that a platform's investment in retail service is not always intended to prevent supplier encroachment. In some cases, such investment is meant to induce a supplier to encroach through the platform. Robustness analysis shows that the main results derived in the basic model hold. Managerial implications are then discussed and provided.