Authorization or encroachment: Effects of channel encroachment on decisions and performance in software service supply chains

At present, plenty of software developers not only sell their software to client firms through downstream service integrators, but also vend it to clients directly. However, little research has been investigated software developers' channel encroachment in the area of software service supply chain (SSSC) management. In this study, we examine a SSSC with a developer, an integrator, and client firms. Clients can either purchase software from the integrator at high prices and with accessorial pre-sale services, or procure it directly from the developer at low prices but with no pre-sale services. After purchasing software, clients can also purchase the extended warranty service (EWS) from the developer. We investigated the two cooperation modes, i.e., the "Authorization" (marked as mode A) and the "Authorization + direct sales" (marked as mode E), and analyzed effects of the developer's channel encroachment on equilibrium decisions of SSSC members and on SSSC performance. It is shown that both the sensitivity of clients to the EWS price and the EWS cost cannot affect the software pricing decision of the integrator in the mode A, but those can affect that in the mode E. Furthermore, when the EWS cost is high, although the developer can obtain the software authorization revenue, the software sales revenue, and the EWS sales revenue (in the mode E), its channel encroachment will unexpectedly cause its own profit to decline. We also find that if the developer participates in the competition with low intensity, its encroachment is detrimental to both parties; only when the developer participates in the competition with high intensity and has a low-cost advantage, its encroachment can increase its own profit, but it may reduce the profit of the integrator and lead to a decrease in the total SSSC profit. However, we are surprised to find that if the developer participates in the competition with high intensity and its EWS cost is high, its channel encroachment not only increases the integrator's profit but also the total SSSC performance.