The Impact of Platform Encroachment on the Manufacturer’s Financing Strategy

Abstract

Manufacturers with limited funds often seek financial help from outside, usually banks or platforms. However, introducing store brand products (platform encroachment) makes platforms form a competitive and cooperative relationship with manufacturers. To investigate how platform encroachment affects the optimal production decisions and the manufacturer’s financing strategy, this paper establishes a stylized model to capture the strategic interaction between a manufacturer, a platform and a bank. The manufacturer sells a national brand product directly through the platform, which owns a competitive store brand product. By analyzing the equilibrium results, we show that although platform encroachment may reduce the manufacturer’s financing cost, product competition always makes the manufacturer bear more losses. In addition, our results also show that the manufacturer is always willing to adopt the platform financing strategy if the platform does not encroach. However, under platform encroachment, the bank financing strategy may be a better choice for the manufacturer, as long as the commission rate is low enough. Moreover, the platform financing strategy is the Pareto-dominant strategy when the commission rate is high. Finally, we verify the accuracy and robustness of the conclusions of the basic model through numerical analysis and extension. Using the results we derive, we explain the market practices and provide valuable guidelines for manufacturers to choose financing strategies under platform encroachment.