1.1. Background and Motivation

With the rapid development of big data and mobile technology, consumers can easily browse product information and order through the e-tailer (https://www.collinsdictionary.com/us/dictionary/english/e-tailer). According to Statista, the global e-commerce market reached approximately $6 trillion in 2024, and is expected to reach $8 trillion by 2028 (https://www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/). In China, the total retail sales of social consumer goods were 47.1 trillion yuan in 2023, and online retail sales accounted for 27.6% of total retail sales (https://www.stats.gov.cn/english/PressRelease/202402/t20240201_1947119.html). In the United States, e-commerce sales reached $1.2 trillion in 2024, accounting for 22.7% of total retail sales, and are expected to grow to $1.6 trillion by 2028 (https://www.retaildive.com/news/online-retail-sales-increase-over-1-trillion-report/721564/). In 2024, over 2.7 billion people were expected to buy goods and services online (https://www.oberlo.com/statistics/how-many-people-shop-online). The high demand in the online market has attracted many manufacturers to distribute their products through online retail platforms such as Amazon, JD, and Tmall. For manufacturers who distribute the products through online retail platforms, the reselling channel is the only choice (e.g., in the early stages of Amazon and JD). The supplier is distant from the end consumers and lacks the flexibility to set prices in the reselling channel. In practice, a phenomenon known as supplier encroachment emerges, whereby some manufacturers choose to retail products in the end market through the direct online sales channel in addition to wholesaling products to the e-tailer, thus expanding the demand in the market. For example, Chinese smartphone maker OnePlus wholesales the phones to JD and sells directly to end-consumers at the online OnePlus store (https://www.oneplus.com/cn). Also, Lee Kum Kee, a Hong Kong-based food company, wholesales the products to HKSuning.com and sells directly to end-consumers at its online store (https://shop.lkk.com/).

The manufacturer is distant from the end-consumer market and lacks information about market demand, whereas the e-tailer has more information about market demand because of the massive transactions and the closer contact with consumers. The e-tailer has access to a vast amount of consumer transaction and behavior data and can forecast downstream market demand. In addition, information technology can help e-tailers share data more effectively, and empirical studies show that information sharing improves the supply chain’s ability to respond to uncertain market demand [1]. Meanwhile, e-tailers can accurately grasp current consumer trends through data-driven analysis. E-tailers can describe, predict, and analyze consumer behavior to locate the consumption points that most stimulate consumers’ willingness to buy and realize personalized recommendations and precision marketing, thus improving consumer utility [2]. For example, Tmall has created a series of targeted marketing programs for Shiseido based on data and content and established a Shiseido-specific database (https://www.nbd.com.cn/rss/toutiao/articles/1338127.html). Amazon’s “Selling Coach” allows merchants to grow their sales profitably on Amazon.com by tracking key metrics such as sales, traffic, and conversions (https://www.sellerapp.com/amazon-selling-coach.html). The purpose of all DDM efforts is to enable the e-tailer to expand the market demand and to increase the profit, and the e-tailer generally faces channel selection and information sharing decisions. The system-wide combined effect of the spillover effect and the marginal cost of DDM effort on the information sharing and encroachment decisions remains unclear.

1.2. Research questions and contributions

There is no existing theory to shed light on the interplay of information sharing and encroachment decisions in the e-commerce supply chain considering DDM effort. We hope to bridge this gap by building analytical models to study the matter. We analyze four scenarios considering the decisions of the manufacturer and the e-tailer: no direct channel and no information sharing (NN), no direct channel and information sharing (NS), direct channel and no Information sharing (EN), and direct channel and information sharing (ES). We ask the following research questions.

1. What are the manufacturer’s and e-tailer’s equilibrium decisions (such as wholesale price, selling quantity, and DDM effort) under different scenarios?
2. What is the incentive for the e-tailer to share demand information with the manufacturer?
3. How do information sharing and the cost of DDM effort impact the manufacturer’s encroachment decision of whether or not to add the direct channel to an existing reselling channel?

To study these questions, we develop a game-theoretic model in which one manufacturer has an existing reselling relationship with an e-tailer. When the manufacturer successfully encroaches, the manufacturer adopts both the reselling and direct channels to distribute products. To be consistent with the practices of e-tailers like Amazon and JD, we assume that the e-tailer exerts DDM effort to increase the market demand, and the e-tailer’s DDM effort can also positively affect the demand in the manufacturer’s direct channel. For scenario NN, the manufacturer decides on the wholesale price based on the prior beliefs, and then the e-tailer decides on the selling quantity and DDM effort based on the market demand information. For scenario EN, the manufacturer decides on the wholesale price in the reselling channel and the selling quantity in the direct channel based on prior beliefs. For scenario NS and scenario ES, the manufacturer and the e-tailer make decisions based on the market demand information. Our models generate several novel insights. It rigorously analyzes the interplay of information sharing and channel selection decisions and reveals how the spillover effect and the cost associated with DDM effort jointly determine channel structure and operational decisions. Moreover, it highlights the critical role of channel structure and information availability in shaping the e-tailer’s incentive to invest in DDM activities.

1.3. Major findings and paper structure

Our analysis reveals that the manufacturer has the incentive to reduce the wholesale price to incentivize the e-tailer to increase the DDM effort when the spillover effect is large and the marginal cost of DDM effort is low. When the manufacturer encroaches on the direct channel, the e-tailer may share information if the spillover effect is low. Regardless of whether the e-tailer shares or not share demand information, the manufacturer should encroach on the direct channel when the spillover effect is low. When the spillover effect is moderate, the manufacturer should encroach on the direct channel if the marginal cost of DDM effort is relatively low or large, and the manufacturer should not encroach on the direct channel if the marginal cost of DDM effort is moderate. When the spillover effect is large, the manufacturer should not encroach on the direct channel if the marginal cost of DDM effort is low, and otherwise. When the manufacturer encroaches on the direct channel and the online retailer shares information, there exists a win-win situation for both the manufacturer and the online retailer when the spillover effect and the marginal cost of DDM effort are all low. We extend the base case to the case that the manufacturer can adopt the agency channel, and we show that the manufacturer should adopt the agency channel only if the marginal cost of DDM effort is moderate and the commission rate is low.

The remainder of the paper is organized as follows. In the next section, we position our paper in the context of the literature. In section 3, we present the model assumption, demand functions, and game sequence. In section 4, we derive the equilibrium outcomes under different scenarios and make the comparative analysis. In section 5, we extend the model to the case that the manufacturer can select the agency channel. In section 6, we present our conclusion. The proofs of all the propositions are presented in the online appendix S1 File.

2.1. Supplier encroachment and dual-channel retailing

Dual-channel retailing has attracted much attention over the past decades, and many scholars have studied the manufacturer’s channel selection decisions, including whether the manufacturer should introduce an online channel in addition to the traditional reselling channel to sell products directly to consumers. The behavior of the manufacturer competing with the retailer by introducing a new channel is known as supplier encroachment, which is a common way for manufacturers to increase online sales [3,4]. Huang et al. [5] consider two key features of the hybrid selling strategy are captured: the demand expansion and profit margin effects. Yang et al. [6] consider nonlinear pricing and show that supplier encroachment always hurts the retailer’s profit, and the impact on the manufacturer itself depends on the manufacturer’s bargaining power. However, there are also some studies showing that supplier encroachment can be beneficial to the retailer. Tsay and Agrawal [7] show that introducing the direct channel by the manufacturer can promote greater profit for both the manufacturer and the retailer when the reselling channel is less efficient in stimulating demand through sales effort. Arya et al. [8] show that when the online direct channel is relatively cost-inefficient, the manufacturer will lower the wholesale price to drive consumers to the retail channel, and there will be a win-win situation for both the manufacturer and the retailer when the wholesale price effect is significant. Wang et al. [9] explore channel selection and pricing strategies in the supply chain and find that multichannel sales are the best option for the manufacturer when the difference in operating costs between online and offline channels is low enough. Shen et al. [10] examine the channel choices for the manufacturer to sell products through the online agency channel or the brick-and-mortar store. Zhang and Hezarkhani [11] investigate the manufacturer’s channel choice decisions among the direct channel, the reselling channel, and the dual channel. There are also some scholars working on pricing strategies [12,13] and product distribution strategies [14,15] in the background of dual-channel competition. Our paper adds to this literature by analyzing the interplay between information sharing and encroachment and investigating the impact of the spillover effect and the cost of DDM effort on the decisions.

2.2. Vertical information sharing in the supply chain

Our study belongs to the vast literature on vertical information sharing in supply chains [16–19]. In this stream of research, many studies consider the situation where the downstream retailer has more demand information than the supplier and analyze the information sharing incentives. Ha and Tong [20] and Ha et al. [21] further extend the model to the setting of channel competition, where retailers can share information with the manufacturer in each channel. Li and Zhang [22] investigate the effect of information confidentiality on supply chain members’ incentive to share information in a competitive environment that consists of a manufacturer and multiple retailers. Yoon et al. [23] consider a multi-tier supply chain consisting of a manufacturer, a first-tier manufacturer, and a second-tier manufacturer, where the first-tier manufacturer has access to the second-tier manufacturer’s information and may share the information with the manufacturer, and they investigate how information sharing strategy affects the manufacturer’s and the first-tier manufacturer’s decision making. Guan et al. [24] investigate the value of information sharing when the manufacturer encroaches on the retailer’s market by introducing a direct channel. Liu et al. [25] investigate the optimal information sharing strategy of the online retail platform while multiple sellers compete. Ha et al. [26] develop a game model to explore the manufacturer’s agency channel encroaching strategy and the online platform’s information sharing strategy when the reselling channel already exists. Tang et al. [27] study the manufacturer’s encroachment strategy (the direct channel or the agency channel) and the platform’s information sharing strategy and show that the online platform is more willing to share information to induce manufacturers to encroach on the agency channel. Cui et al. [28] consider the manufacturer’s channel choice (the reselling channel or the agency channel) and the platform’s information sharing strategy in the case where the online platform wholesales products from the manufacturer as the private label. To the best of our knowledge, none of these papers examine the impact of information sharing on firms’ channel structure decisions in the e-commerce supply chain considering DDM effort.

2.3. Data-driven marketing in retail management

A couple of insightful discussion papers related to data-driven marketing have been published in recent years. Most of the literature analyzes DDM qualitatively, including techniques, opportunities, regulation, data foundations, and applications [29–31]. For example, Rust and Huang [32] discuss how big data will revolutionize service research and transform marketing science research. Aral and Walker [33] conducted experiments on social media (Facebook) to randomly manipulate the messages sent by users of a particular feature. The authors determined the impact of bond strength and embeddedness. Their findings illustrate how social analytics can be used to improve marketing operations. Cali and Balaman [34] propose a novel decision support system for product ranking problems. They consider a set of product criteria and customer reviews posted on the website related to these criteria to recommend the most appropriate choice to potential customers. Several scholars have analyzed the impact of DDM on decision-making and profitability by building mathematical models. Ghoshal et al. [35] quantitatively analyzed a platform’s data federation decisions in terms of personalized recommendations based on big data. They found that non-personalized companies are always willing to share their data with personalized companies. Liu et al. [36] investigate a platform’s preferences between agency selling and reselling considering the impact of DDM. Xu et al. [37] explore how DDM impacts the quality improvement effort, online inventory level, and offline order quantity. Xing et al. [38] analyze different pricing scenarios in the video service supply chain considering DDM. Our paper makes a novel contribution to this literature by showing how channel structure and information sharing impact an e-tailer’s incentive to exert DDM effort.

4.1. Scenario NN: no direct channel and no information sharing

In this setting, the expected profits of the manufacturer and the e-tailer are, respectively

(3)

(4)

With backward induction, given the wholesale price of the product , the e-tailer solves the following problem

(5)

By solving the above problem, we derive the e-tailer’s best responses to wholesale price :

(6)

(7)

Without information sharing, by anticipating the e-tailer’s best-response functions, the manufacturer solves the following problem

(8)

By solving the above optimization problem, we obtain the equilibrium wholesale price :

(9)

By anticipating into the e-tailer’s best-response functions, we have the following equilibrium decisions:

(10)

(11)

By anticipating the above equilibrium results back to the profit functions, we have

(12)

(13)

The above equilibrium results demonstrate that the manufacturer’s wholesale price and profit are independent of the demand signal when the e-tailer does not share information, and the manufacturer can only make decisions based on the prior beliefs. The e-tailer has an information advantage, the greater the precision of the information, the more efficiently the e-tailer can cope with the uncertainty of the market information, and the greater the selling quantity, the sells effort, and the profit, that is,,,.

4.2. Scenario NS: no direct channel and information sharing

In this setting, given the wholesale price of the product , the e-tailer solves the following problem

(14)

By solving the above problem, we derive the e-tailer’s best responses to wholesale price :

(15)

(16)

With information sharing, based on the e-tailer’s best-response functions, the manufacturer solves the following problem

(17)

By solving the above optimization problem, we solve the equilibrium wholesale price :

(18)

By anticipating into the e-tailer’s best-response functions, we have the following equilibrium decisions:

(19)

(20)

By anticipating the above equilibrium results back to the profit functions, we have the manufacturer’s and e-tailer’s ex ante profits are given by:

(21)

(22)

The above equilibrium results demonstrate that the manufacturer’s wholesale price and profit, as well as the e-tailer’s DDM effort, profit, and selling quantity increase with information precision when the e-tailer share information.

4.3. Scenario EN: direct channel and no information sharing

In this setting, the manufacturer and the e-tailer solve the following problems

(23)

(24)

By solving the above problem, we derive the manufacturer’s and e-tailer’s best response to selling quantity in the reselling channel:

(25)

(26)

Without information sharing, taking the above best response functions into account, the e-tailer solves the following problem

(27)

By solving the above optimization problem, we derive the e-tailer’s best response with respect to wholesale price :

(28)

By anticipating the e-tailer’s best response function into the manufacturer’s profit function, the manufacturer solves the following problem:

(29)

By solving the above optimization problem, we solve the equilibrium wholesale price :

(30)

By anticipating back, we have the following equilibrium decisions:

(31)

(32)

(33)

Consequently, we have

(34)

(35)

The above equilibrium results demonstrate that the e-tailer’s profit decreases with increasing information precision (i.e.,) when the spillover effect is low (

4.4. Scenario ES: direct channel and information sharing

In this setting, the manufacturer and the e-tailer solve the following problems

(36)

(37)

As before, we derive the manufacturer’s and e-tailer’s best response to selling quantity in the reselling channel:

(38)

(39)

With information sharing, by anticipating the above best-response functions, the e-tailer solves the following problem

(40)

By solving the above optimization problem, we derive the e-tailer’s best response with respect to wholesale price :

(41)

By taking the e-tailer’s best response function into account, the manufacturer solves the following problem:

(42)

By solving the above optimization problem, we solve the equilibrium wholesale price :

(43)

By substituteing back, we have the following equilibrium decisions:

(44)

(45)

(46)

By substituteing the above equilibrium decisions back to the profit functions, we have

(47)

(48)

The above equilibrium results demonstrate that the equilibrium decisions increase with the increase of information precision.

4.5. Comparative analysis

We compare the equilibrium DDM effort, equilibrium wholesale price, equilibrium selling quantity, and the equilibrium profits of the manufacturer and the e-tailer in scenario NN and scenario NS leading to Proposition 1.

Proposition 1. (a).(b) .(c) . , and .

Proposition 1 demonstrates that when there is no encroachment, if the e-tailer shares information, then the manufacturer adjusts the wholesale price based on demand information, which enhances the double marginal effect of the wholesale price, making the platform adjust the retail price consequently, leading to higher retail price and lower selling quantity. Information sharing by the e-tailer is beneficial to the manufacturer but lowers the profitability of the e-tailer, and the above findings are inconsistent with the existing literature [26]. Part (a) shows that when the e-tailer shares demand information, it becomes less profitable for the e-tailer and the e-tailer has less incentive to conduct DDM effort. We compare the equilibrium DDM effort, equilibrium wholesale price, equilibrium selling quantity, and the equilibrium profits of the manufacturer and the e-tailer in scenario EN and scenario ES leading to Proposition 2.

Proposition 2. (a). (b) There exists such that if (i) 0 or (ii) and , and if and ,where is given in the Appendix B in S1 File. (c). . (d) . When 0 , , and otherwise.

Proposition 2 shows that when the manufacturer encroaches on the direct channel if the e-tailer shares information, it leads to a decrease in selling quantity in the reselling channel, an increase in selling quantity in the direct channel, and a decrease in DDM effort. Part (b) shows that the manufacturer may increase the wholesale price of the product when the spillover effect is low or when the spillover effect is large and the marginal cost of DDM effort is large. The manufacturer has the incentive to reduce the wholesale price to incentivize the e-tailer to increase the DDM effort when the spillover effect is large and the marginal cost of DDM effort is low. This can be explained by the manufacturer’s incentive to motivate the e-tailer to exert more DDM effort. Fig 3 illustrates the results. Part (d) shows that information sharing is beneficial to the manufacturer and the e-tailer may share information when the spillover effect is low.

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Fig 3. The wholesale price comparison in scenario EN and scenario ES.

https://doi.org/10.1371/journal.pone.0328040.g003

Now, we compare the equilibrium DDM effort, equilibrium wholesale price, and equilibrium selling quantity in scenario EN and scenario NN leading to Proposition 3.

Proposition 3. (a) There exists and such that if (i) 0 and or (ii) 0 , and or (iii) , and , and if (i) 0 , and or (ii) and or (iii) , and , where and are given in the Appendix B in S1 File. (b).

Proposition 3 implies when the e-tailer does not share information, if the manufacturer encroaches on the direct channel, the manufacturer reduces the wholesale price. The e-tailer has an information advantage over the manufacturer and knows the actual demand for products in the market. If the marginal cost of DDM effort is low, the e-tailer has more incentive to exert DDM effort when the spillover effect is low and decreases DDM effort when the spillover effect is large. The e-tailer should increase DDM effort when the mean market size is lower than a threshold, and decrease DDM effort when the mean market size is larger than a threshold. We compare the equilibrium DDM effort and equilibrium wholesale price in scenario NS and scenario ES leading to Proposition 4.

Proposition 4. (a) if (i) 0 and or (ii) , and if 0 and . (b) .

Proposition 4 demonstrates when the e-tailer shares information, the manufacturer will reduce the wholesale price if the manufacturer encroaches on the direct channel, the finding is consistent with the case when the e-tailer does not share information. When the spillover effect is low, the e-tailer should increase the DDM effort if the marginal cost of DDM effort is lower than a threshold, decrease the DDM effort if the marginal cost of DDM effort is larger than a threshold, and always decrease the DDM effort when the spillover effect is large. As illustrated in Fig 4, the threshold decreases with the increase in spillover effect

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Fig 4. The DDM effort comparison in scenario NS and scenario ES.

https://doi.org/10.1371/journal.pone.0328040.g004

We compare the equilibrium DDM effort and equilibrium wholesale price in scenario NS and scenario ES leading to Proposition 5.

Proposition 5. There exists and such that , if (i) 0 or (ii) and or or (iii) and , and if (i) and or (ii) and , where and are given in the Appendix B in S1 File.

When the manufacturer encroaches on the direct channel, the manufacturer’s profit consists of two parts, including the revenue from the reselling channel and the direct channel. when the spillover effect and marginal cost of DDM effort meet certain conditions, the manufacturer’s encroachment on the direct channel is not more profitable. From Fig 5, Region A denotes that the manufacturer gains more profit in the case of encroaching on the direct channel than in the case of not encroaching on the direct channel, and Region B denotes that the manufacturer gains less profit in the case of encroaching on the direct channel than in the case of without encroachment. The manufacturer should adjust the selling channel strategy to achieve a higher profit. Regardless of whether the e-tailer shares or not shares demand information the manufacturer should encroach on the direct channel when the spillover effect is low. When the spillover effect is moderate, the manufacturer should encroach on the direct channel if the marginal cost of DDM effort is low or large, and the manufacturer should not encroach on the direct channel if the marginal cost of DDM effort is moderate. When the spillover effect is large, the manufacturer should not encroach on the direct channel if the marginal cost of DDM effort is low, and otherwise

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Fig 5. The manufacturer’s profit comparison with or without direct channel.

https://doi.org/10.1371/journal.pone.0328040.g005

We compare the equilibrium DDM effort and equilibrium wholesale price in scenario NS and scenario ES leading to Proposition 6.

Proposition 6. (a) When the online retail does not share information, there exists and such that if 0,, and , and if (i) 0 ,,and or (ii) 0 and or (iii) .(b) When the online retail share information, there exists such that if 0 and and if (i) 0 and or (ii) 0 , where and are given in the Appendix B in S1 File.

Proposition 6 shows when the e-tailer does not share information and the spillover effect is low, the e-tailer prefers the manufacturer not to encroach on the direct channel if the marginal cost of DDM effort is low and the mean market size is low, and the e-tailer prefers the manufacturer to encroach on the direct channel if the marginal cost of DDM effort is large or if the marginal cost of DDM effort is low and the mean market size is large. When the spillover effect is large, the e-tailer prefers the manufacturer to encroach on the direct channel. When the e-tailer shares information, when the spillover effect is low, the e-tailer prefers the manufacturer to encroach on the direct channel if the marginal cost of DDM effort is low, and prefers the manufacturer not to encroach on the direct channel if the marginal cost of DDM effort is large. When the spillover effect is large, the e-tailer prefers the manufacturer not to encroach on the direct channel.

Remark 1. When the manufacturer encroaches on the direct channel and the e-tailer shares information, there exists a win-win situation for both the manufacturer and the e-tailer when both the spillover effect and the marginal cost of DDM effort are low.