Supplier Encroachment and Retail Service Effort: the Role of Carry-over Effect and Strategic Inventory

The growing prevalence of direct-to-consumer channels has intensified supplier encroachment concerns for retailers. While retail service effort is commonly used to stimulate demand and deter supplier encroachment, its effects often persist across selling seasons through a carry-over effect. Despite its practical relevance, the role of the carry-over effect in shaping supplier encroachment decisions remains largely unexplored. In this paper, we examine how the carry-over effect of retail service effort influences supplier encroachment and the effectiveness of retailer deterrence strategies. We develop a two-period Stackelberg game-theoretic model between a supplier and a retailer, informed by consumer survey data and practitioner interviews with retailer and supplier firms. Our results show that retail service effort does not always deter supplier encroachment. When the carry-over effect is sufficiently strong, the supplier can partially free-ride on the retailer’s past service effort, making supplier encroachment attractive even at higher direct selling costs. We further find that strategic inventory complements service effort only when the retailer carries a limited amount of inventory across selling periods. Interestingly, moderate order quantity restrictions imposed by the supplier facilitate supplier encroachment, whereas excessive restrictions suppress demand and reduce the supplier’s incentive to encroach. Finally, under upstream supplier competition, supplier encroachment becomes more likely when competing products are highly substitutable, and the carry-over effect is strong. Overall, our findings demonstrate that the carry-over effect is a critical driver of supplier encroachment decisions and alters the effectiveness of traditional retailer deterrence mechanisms.