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Franchisees within large branded chains loudly complain of a form of channel conflict known as "encroachment" or "impact." Encroachment occurs when franchisors add new units of their brand proximately to their franchisees' existing units. Franchisees claim that their revenues have substantially decreased as a result of encroaching same-brand entry. The topic of encroachment has not only dominated franchisee association agendas and trade journal headlines but has also become a hot topic for politicians and policymakers. Yet, until now, evidence of encroachment has been strictly anecdotal. This paper provides the first systematic evidence of encroachment. Using revenue data from the Texas lodging industry in the 1990s, I find that when franchisors approve new same-brand units in the vicinity of incumbent units, these new units cannibalize the incumbents' revenues. In contrast to the result for franchisors, the addition of a new unit by company-owned brands in the vicinity of same-brand units is associated with an increase in the incumbents' revenues. This contrast suggests that encroaching behavior is caused by incentives that result from the governance form of franchising and is not simply an outcome that accompanies all expansion. This finding informs theory on governance forms and exclusive territories. Implications for practitioners and policy are also discussed. [ABSTRACT FROM AUTHOR]

We study a supply chain with manufacturer encroachment in which product quality is endogenous and customers have heterogeneous preferences for quality. It is known that, when quality is exogenous, encroachment could make the retailer better off. Yet, when quality is endogenous and the manufacturer has enough flexibility in adjusting quality, we find that encroachment always makes the retailer worse off in a large variety of scenarios. We also establish that, while a higher manufacturer's cost of quality hurts the retailer in absence of encroachment, it could benefit the retailer with encroachment. In addition, we show that a manufacturer offering differentiated products through two channels prefers to sell its high-quality product through the direct channel. Contrary to conventional wisdom, quality differentiation does not always benefit either manufacturer or retailer. Our results may explain why, despite extant theoretical predictions, retailers almost always resent encroachment. These findings also suggest that firms must be cautious when adopting quality differentiation as a strategy to ease channel conflict caused by encroachment. [ABSTRACT FROM AUTHOR]

The common wisdom is that a retailer suffers when its wholesale supplier encroaches on the retailer's operations by selling directly to final consumers. We demonstrate that the retailer can benefit from encroachment even when encroachment admits no synergies and does not facilitate product differentiation or price discrimination. The retailer benefits because encroachment induces the encroaching supplier to reduce the wholesale price in order not to diminish unduly the retailer's demand for the manufacturer's wholesale product. The lower wholesale price and increased downstream competition mitigate double marginalization problems and promote efficiency gains that can secure Pareto improvements. [ABSTRACT FROM AUTHOR]