Investment And Encroachment Strategies For Firms With Free-Riding Behavior

Many firms are making cost reduction investments to gain competitive advantages and to enlarge the market share,especially in the trend in which outsourcing is becoming more and more popular.However,a common upstream manufacturer may simultaneously cooperate with several competing firms.In this case,a firm’s investment may benefit its rivals at the common manufacturer because of free-riding,which will weaken the firm’s innovative initiatives.Therefore,there arises an interesting topic in the context of free-riding,i.e.,whether or not firms should adopt investment strategies? Besides,the rapid development of e-commerce enables many suppliers to directly get access to final consumers by establishing their Internet channels.Suppliers may encroach on the retail market to compete with the incumbent retailers.Meanwhile,consumers are also getting smarter – they may enjoy the service provided at the traditional retail stores to learn the performance and functionality of the product,but eventually buy it directly from the supplier.In other words,the encroaching supplier benefits from the retailer’s service and thus leads to service free-riding in the dual-channel supply chain.As a commonly seen phenomenon in industrial practices,free-riding has received increasing attention in recent years,both theoretically and practically.Under service or investment freeriding,a firm could obtain benefits from its competitors without paying them any related costs.The main issues addressed in this thesis are as follows: First,in the presence of investment free-riding,whether or not a firm should make investments in process or service to enhance its competitive advantages? If so,how would the free-riding factor affect the investor’s and free-rider’s optimal decisions and profits? Second,asymmetric free-riding may occur because of different operations modes across industries,which means the benefits a firm gained by free riding on the others’ investment may not equal those the rivals got from the firm’s investment.In this case,should competing firms make such investments? What is the impact of different levels of free-riding factor on their optimal decisions and profits? Lastly,whether a supplier should encroach on the market by establishing an Internet channel,given that it can free ride on the service the retailer provided in the traditional retail channel? If so,how do factors such as the free-riding factor and encroaching cost interact with the supplier’s optimal encroachment strategies?In this thesis,we focus on the issues of the optimal investment and encroachment strategies for competitive firms in the context of free-riding.Multidisciplinary research methods and technologies,such as game theory,management,economics,marketing science,computer science and technology,and optimization theory,are utilized to establish the conceptual and game-theoretic models.All the models are solved by backward inductions,and the impacts of free-riding factor,product substitutability,etc.,on the optimal investment and encroachment strategies are analyzed.Managerial insights are also provided based on the analytical analysis in each setting.In particular,we mainly made the following research.First,we consider a supply chain in which two competitive manufacturers may make process investment to a common supplier to reduce the production costs.However,each manufacturer could free ride on each other’s investment at the common supplier.The main issue is whether or not the two manufacturers should make such investment in the context of free-riding.Game-theoretic models in four cases are developed,and the effects of free-riding factor,product substitutability,and the difference of the initial production costs on the investment equilibria are analyzed.The results show that the optimal process investment strategies depend not only upon the free-riding factor,but also on the initial production costs of the two products.In particular,if the difference of the initial production costs is high,the manufacturer with a cost advantage(disadvantage)will be the unique investor(free-rider).Otherwise,the investment equilibria will be contingent on the free-riding factor: If it is low,both manufacturers invest;if it is medium,they either jointly invest or jointly exit;otherwise neither manufacturer invests.In equilibrium,joint investment may make a manufacturer win and the other one lose,lead to Pareto improvement,or result in a prisoners’ dilemma.Furthermore,there exist several thresholds such that the manufacturers will adjust the optimal process investment strategies by comparing them with the difference of the initial production costs and product substitutability.Second,we consider the setting where two competitive firms make R&D investment when each firm could free rider on the investment of its competitor,but the extents of free-riding between them are asymmetric.To investigate the issue whether or not two competing firms should make in the context asymmetric free-riding,we develop game-theoretic models in the cases with and without investment,respectively.Then,the equilibrium outcomes of the models are compared to demonstrate how would different free-riding factors influence the two firms’ optimal investment strategies.The main findings demonstrate that both the differentiated free-riding factor and the level of product differentiation play key roles in affecting the optimal R&D investment strategies.More precisely,the two firms make investments if both of them face low free-riding factors.The firm with a low free-riding factor behaves as the investor,and the other would free ride rather than invest if it faces a high free-riding factor.They either jointly invest or jointly exit if the free-riding factors are in intermediate levels.Otherwise,neither firm invests in R&D.Moreover,we reveal that consumer surplus maintains at the highest level when both firms invest,keeps at the secondary place when a single firm invests,and falls into the worst case when there is no investment.In addition,consumer surplus improves with the increases of the free-riding factor or the level of product differentiation.Finally,we investigate the optimal encroachment strategies for a supplier that has different channel power,and examines how they affect the retailer and supply chain performance in the context of service free-riding.Consumer behavioral theory is utilized to characterize consumers’ purchasing decisions,based on which we write out the demand functions for the traditional channel and the Internet channel.Afterwards,game theory is used to develop decision model when the supplier and the retailer,respectively,behave as the Stackelberg leader.Analysis of the equilibrium outcomes shows that the supplier’s optimal encroachment strategies depend critically on the selling cost of the Internet channel,the factor of service free-riding and channel power.In particular,if the supplier acts as the Stackelberg leader,it is profitable to encroach on the market by introducing an Internet channel,provided that the selling cost of this channel is small enough.Otherwise,the supplier should just rely on the retail channel to sell products.Surprisingly,supplier encroachment motivates the retailer to enhance her service level and helps her get more profit when the service of the retail channel greatly spills over to the Internet channel.As a result,larger factor of service free-riding leads to a “win-win” outcome,gives rise to a Pareto improvement and improves the supply chain performance.If the retailer acts as the Stackelberg leader,she is always worse off under supplier encroachment.Interestingly,the supplier has an incentive to encroach on the market only when the selling cost of the Internet channel is small,and lower factor of service free-riding makes encroachment more likely to happen.In this case,there is no Pareto improvement due to the “lose-win” outcome for the retailer and the supplier.However,the supply chain performance of the dual-channel could be improved as long as the selling cost of the Internet channel is small.From the standpoint of the channel power,we reveal that under no-encroachment,any firm who behaves as the Stackelberg leader would gain more profit than when she/he as the follower.Under encroachment,the supplier continues to be better off if he acts as the leader.However,being a leader may not profitable to the retailer,especially when the supplier’s selling cost is sufficiently low and the factor of service free-riding is large.The supplier’s optimal encroachment strategies depend critically on the selling cost of the Internet channel,the service spillovers and channel power.In particular,if the supplier behaves as the Stackelberg leader,it is profitable for him to encroach on the market by introducing an Internet channel,provided that the selling cost of this channel is small enough.Otherwise,the supplier should just rely on the retail channel to sell products.Surprisingly,supplier encroachment motivates the retailer to enhance her service level and helps her get more profit when the service of the retail channel greatly spills over to the Internet channel.As a result,strong service spillovers lead to a “win-win” outcome,give rise to a Pareto improvement and improve the supply chain performance.If the retailer acts as the Stackelberg leader,she is always worse off under supplier encroachment.Interestingly,the supplier has an incentive to encroach on the market only when the selling cost of the Internet channel is small,and weaker service spillovers make encroachment more likely to happen.In this case,there is no Pareto improvement due to the “lose-win” outcome to the retailer and the supplier.However,the supply chain performance of the dual-channel could be improved as long as the selling cost of the Internet channel is small.From the standpoint of the channel power,we reveal that under no-encroachment,any firm who behaves as the Stackelberg leader would gain more profit than when it is the game follower.Under encroachment,the supplier continues to be better off if he acts as the game leader.However,being a leader may not profitable to the retailer,especially when the supplier’s selling cost is sufficiently low and the service spillovers are strong.