The impact of quantity-based cost decline on supplier encroachment

We study a supply chain in which a supplier with encroachment capability and quantity-based cost decline sells through a retailer with demand information advantage. By solving a signaling game, we find that cost decline increases the possibility of order distortion. The obtained results also show that without encroachment, both supply chain members are better off from cost decline; with encroachment, cost decline always hurts the retailer and benefits the supplier only if the direct selling cost is not very high. In addition, encroachment benefits the supplier when the direct selling cost or the cost decline efficiency is relatively low, while benefits the retailer when the direct selling cost is sufficiently high. Finally, we discuss on different information structures and obtain some information management insights.