Research on backward integration strategy of dominant retailer in the face of encroachment

A two-level supply chain is studied which includes an incumbent manufacturer, an entrant manufacturer and a dominant retailer. Supply chain models under different integration strategies are established to explore the backward integration strategy of the dominant retailer when facing the entrant's encroachment, and analysis the impact of encroachment on the incumbent. The results show that the encroachment of entrant can weaken the double marginal effect in the supply chain. Encroachment increases retailer's profit, and in most cases will harm the interests of incumbent manufacturer. Retailer’ non-integration strategy is a strictly dominated strategy. When the retailer integrates with one manufacturer, it is unfavorable to another manufacturer that is not vertically integrated. Backward-integration can further alleviate the double marginal effect of the supply chain. The dominant retailer's optimal backward integration strategy mainly depends on the role of service efficiency, quality difference and production cost. When the retailer chooses the optimal partial integration strategy, it can increase the total profit of the supply chain system and consumer surplus.