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## Effects of channel encroachment on the software and service decisions in it supply chains

 1 School of Business Administration, Guizhou University of Finance and Economics, Guiyang 550001, China 2 School of Economics and Management, Harbin Engineering University, Harbin 150001, China

* Corresponding author: Tinghai Ren

Received  December 2020 Revised  May 2021 Early access August 2021

Currently, many upstream software developers not only sell software through downstream service providers, but also directly sell it to clients. However, in the field of IT service supply chain management, there is a lack of research on the channel encroachment of software developers. In this study, we consider an IT service supply chain with a software developer, a service provider and client enterprises. Clients can either purchase the software (developed by the software developer) from the provider with a high price and additional pre-sale services, or directly purchase it from the developer with a low price but without pre-sale service. After purchasing the software, the clients can also purchase the extended warranty service from the developer. The study shows that the market size occupied by the developer and the intensity of competition between the two parties will neither affect the developer's product and service pricing decisions, nor influence the total demand for software products and extended warranty services, and thus will not impact his own profit. However, these factors will impact the provider's decisions for pre-sale service quality and software sales price, thereby affecting the provider's software demand and profit, and thus impact the performance of the supply chain. In addition, as the intensity of competition between both parties increases, the provider will simultaneously choose to reduce the pre-sales service quality and the software sales price to compete with the developer. Different from conclusions of the existing research on competition, we surprisingly observe that as the sensitivity of client enterprises to the extended warranty services price increases, both parties will increase the software price to compete. The encroachment of the developer will reduce the provider's software demand and profit, and thus lead to a decline in the performance of the supply chain. Therefore, the encroachment of the developer is an act of squeezing out partners by decreasing the profit of the provider, but without affecting his own profit.

Citation: Tinghai Ren, Nengmin Zeng, Dafei Wang, Shuwei Cheng. Effects of channel encroachment on the software and service decisions in it supply chains. Journal of Industrial and Management Optimization, doi: 10.3934/jimo.2021136
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show all references

##### References:
 [1] H. Akkermans and B. Vos, Amplification in service supply chains: An exploratory case study from the telecom industry, Production and Operations Management, 12 (2003), 204-223.  doi: 10.1111/j.1937-5956.2003.tb00501.x. [2] S. S. Ali, R. Kaur, D. J. Persis, R. Saha, M. Pattusamy and V. R. Sreedharan, Developing a hybrid evaluation approach for the low carbon performance on sustainable manufacturing environment, Annals of Operations Research, (2020), 1-33. doi: 10.1007/s10479-020-03877-1. [3] F. Bernstein and A. Federgruen, Coordination mechanisms for supply chains under price and service competition, Manufacturing & Service Operations Management, 9 (2007), 242-262.  doi: 10.1287/msom.1070.0159. [4] E. Bolandifar, P. Kouvelis and F. Zhang, Delegation vs. control in supply chain procurement under competition, Production and Operations Management, 25 (2016), 1528-1541.  doi: 10.1111/poms.12566. [5] S. Boon-itt, C. Y. Wong and C. W. Y. Wong, Service supply chain management process capabilities: Measurement development, International Journal of Production Economics, 193 (2017), 1-11.  doi: 10.1016/j.ijpe.2017.06.024. [6] T. Boyaci and G. Gallego, Supply chain coordination in a market with customer service competition, Production and Operations Management, 13 (2004), 3-22.  doi: 10.1111/j.1937-5956.2004.tb00141.x. [7] G. P. Cachon and M. A. Lariviere, Capacity allocation using past sales: When to turn-and-earn, Management Science, 45 (1999), 686-702.  doi: 10.1287/mnsc.45.5.685. [8] J. Y. T. Chang, E. T. G. Wang, J. J. Jiang and G. Klein, Controlling ERP consultants: Client and provider practices, Journal of Systems and Software, 86 (2013), 1453-1461.  doi: 10.1016/j.jss.2013.01.030. [9] Y.-K. Che and I. Gale, Optimal design of research contests, American Economic Review, 93 (2003), 646-671.  doi: 10.1257/000282803322157025. [10] M. G. Chen, Q. Y. Hu and H. Wei, Interaction of after-sales service provider and contract type in a supply chain, International Journal of Production Economics, 514 (2017), 1-527.  doi: 10.1016/j.ijpe.2017.04.001. [11] X. Chen, N. Wan and X. Wang, Flexibility and coordination in a supply chain with bidirectional option contracts and service requirement, International Journal of Production Economics, 193 (2017), 183-192.  doi: 10.1016/j.ijpe.2017.07.013. [12] China Industry Information, Research report on SAP industry Operation status quo and Development Strategy in China, 2020-2026, https://www.chyxx.com/research/202003/843843.html, (2020). [13] D. W. Cho, Y. H. Lee, S. H. Ahn and M. K. Hwang, A framework for measuring the performance of service of service supply chain management, Computers & Industrial Engineering, 62 (2012), 801-818.  doi: 10.1016/j.cie.2011.11.014. [14] Cniteyes, Research center for mobile informatization, http://www.cniteyes.com/, (2018). [15] S. K. Das, M. Pervin, S. K. Roy and G. W. Weber, Multi-objective solid transportation-location problem with variable carbon emission in inventory management: A hybrid approach, Annals of Operations Research, (2021), 1-27. doi: 10.1007/s10479-020-03809-z. [16] S. K. Das and S. K. Roy, Effect of variable carbon emission in a multi-objective transportation-p-facility location problem under neutrosophic environment, Computers & Industrial Enginee- ring, 132 (2019), 311-324. doi: 10.1016/j.cie.2019.04.037. [17] S. K. Das, S. K. Roy and G.-W. Weber, Application of type-2 Fuzzy logic to a multiobjective green solid transportation-location problem with dwell time under carbon tax, cap, and offset policy: Fuzzy Versus Nonfuzzy techniques, IEEE Transactions on Fuzzy Systems, 28 (2020), 2711-2725.  doi: 10.1109/TFUZZ.2020.3011745. [18] P. S. Desai, O. Koenigsberg and D. Purohit, Forward buying by retailers, Journal of Marketing Research, 47 (2010), 90-102.  doi: 10.1509/jmkr.47.1.90. [19] D. Dey, M. Fan and C. Zhang, Design and analysis of contracts for software outsourcing, Information Systems Research, 21 (2010), 93-114.  doi: 10.1287/isre.1080.0223. [20] Q. Feng and J. G. Shanthikumar, How research in production and operations management may evolve in the era of big data, Production and Operations Management, 27 (2018), 1670-1684.  doi: 10.1111/poms.12836. [21] B. C. Giri and B. R. Sarker, Coordinating a two-echelon supply chain under production when retailers compete with price and service level, Operation Research, 16 (2016), 71-88.  doi: 10.1007/s12351-015-0187-8. [22] Z. Guan, X. Zhang, M. Zhou and Y. Dan, Demand information sharing in competing supply chain with manufacturer-provided service, International Journal of Production Economics, 220 (2020), 107450. doi: 10.1016/j.ijpe.2019.07.023. [23] H. Hao, R. Padman, B. Sun and R. Telang, Quantifying the impact of social influence on the information technology implementation process by physicians: A hierarchical Bayesian learning approach, Information Systems Research, 29 (2018), 25-41.  doi: 10.1287/isre.2017.0746. [24] B. He, G. Li and M. Liu, Impacts of decision sequences on a random yield supply chain with a service requirement, Annals Operation Research, 680 (2018), 469-495.  doi: 10.1007/s10479-016-2275-4. [25] Y. Hong and P. A. Pavlou, On buyer selection of service providers in online outsourcing platforms for IT services, Information Systems Research, 28 (2017), 547-562.  doi: 10.1287/isre.2017.0709. [26] X. Hong, L. Wang, Y. Gong and W. Chen, What is the Role of value-added service in a remanufacturing closed-loop supply chain?, International Journal of Production Research, 58 (2020), 3342-3361.  doi: 10.1080/00207543.2019.1702230. [27] S. Huang, X. Guan and Y. J. Chen, Retailer information sharing with supplier encroachmen, Production and Operations Management, 1 (2018), 1-15.  doi: 10.1111/poms.12860. [28] K. Kang, J. Hahn and P. De, Learning effect of domain, technology, and customer knowledge in information systems development: An empirical study, Information Systems Research, 28 (2017), 797-811.  doi: 10.1287/isre.2017.0713. [29] C. G. Korpeoglu, E. Körpeoǧlu and S.-H. Cho, Supply chain competition: A market game approach, Management Science, 66 (2020), 5648-5664.  doi: 10.1287/mnsc.2019.3511. [30] H. Kurata and S.-H. Nam, After-sales service competition in a supply chain: Does uncertainty affect the conflict between profit maximization and customer satisfaction?, International Journal of Production Economics, 144 (2013), 268-280.  doi: 10.1016/j.ijpe.2013.02.014. [31] N. Langer, S. A. Slaughter and T. Mukhopadhyay, Project managers' practical intelligence and project performance in software offshore outsourcing: A field study, Information Systems Research, 25 (2014), 364-384.  doi: 10.1287/isre.2014.0523. [32] G. Li, F. F. Huang, T. C. E. Cheng, Q. Zheng and P. Ji, Make-or-buy service capacity decision in a supply chain providing after-sales service, European Journal of Operational Research, 239 (2014), 377-388.  doi: 10.1016/j.ejor.2014.05.035. [33] K. Li, Y. Li, Q. Gu and A. Ingersoll, Joint effects remanufacturing channel design and after-sales service pricing: An analytical study, International Journal of Production Research, 57 (2019), 1066-1081.  doi: 10.1080/00207543.2018.1500722. [34] X. Li and Q. Liu, Contract unobservability and downstream competition, Manufacturing & Service Operations Management, (2020), accept. doi: 10.1287/msom.2020.0905. [35] Z. Li, S. Gilbert and G. Lai, Supplier encroachment under asymmetric information, Management Science, 60 (2014), 449-462.  doi: 10.1287/mnsc.2013.1780. [36] J. Ma, D. Zhang, J. Dong and Y. Tu, A supply chain network economic model with time-based competition, European Journal of Operational Research, 280 (2020), 889-908.  doi: 10.1016/j.ejor.2019.07.063. [37] D. Mani, A. Barua and A. B. Whinston, Outsourcing contracts and equity prices, Information Systems Research, 24 (2013), 1028-1049. doi: 10.1287/isre.2013.0478. [38] S. M. Miranda and C. B. Kavan, Monments of governance in is outsourcing: conceptualizing effects of contracts on value capture and creation, Journal of Information Technology, 20 (2005), 152-169.  doi: 10.1057/palgrave.jit.2000045. [39] T. Paksoy, C. G. Kochan and S. S. Ali, Logistics 4.0: Digital Transformation of Supply Chain Management, CRC Press| Taylor & Francis Group, (2020), https://www.routledge.com/Logistics-40-Digital-Transformation-of-Supply-ChainManage-ment/Paksoy-Kochan-Ali/p/book/9780367340032. doi: 10.1201/9780429327636. [40] X. Qin, Q. Su, S. H. Huang, U. J. Wiesma and M. Liu, Service quality coordination contracts for online shopping service supply chain with competing service providers: Integrating fairness and individual rationality, Operation Research, 19 (2019), 269-296.  doi: 10.1007/s12351-016-0288-z. [41] K. Ravindran, A. Susarla, D. Mani and V. Gurbaxani, Social capital and contract duration in buyer-supplier networks for information technology outsourcing, Information Systems Research, 26 (2015), 379-397.  doi: 10.1287/isre.2015.0572. [42] S. Sarker, S. Sarker, A. Sahaym and N. 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The structure of IT service supply chain
Timeline of the events
Monotonicity of ($p_{pm}^{\ast}$, $p_{s}^{\ast}$, $s^{\ast}$, $p_{pr}^{\ast}$) on $\alpha$
Monotonicity of ($p_{pm}^{\ast}$, $p_{s}^{\ast}$, $s^{\ast}$, $p_{pr}^{\ast}$) on $\sigma$
Monotonicity of ($D_{pm}$, $D_{pr}$, $D_{p}$, $D_{s}$) on $\alpha$
Monotonicity of ($D_{pm}$, $D_{pr}$, $D_{p}$, $D_{s}$) on $\sigma$
Monotonicity of ($\pi_{m}$, $\pi_{r}$, $\pi$) on $\alpha$
Monotonicity of ($\pi_{m}$, $\pi_{r}$, $\pi$, $D_{s}$) on $\sigma$
The relationship between the equilibrium decision ($p_{pm}^{\ast}$, $p_{s}^{\ast}$, $s^{\ast}$, $p_{pr}^{\ast}$) and exogenous parameters ($\alpha$, $c_{1}$, $\sigma$, $\eta$)
 Equilibrium decisions Exogenous parameters Monotoni- city on $\alpha$ Monotoni- city on $c_{1}$ Monotoni- city on $\sigma$ Monotoni- city on $\eta$ $p_{pm}^{\ast}$ - $\uparrow$ - $\uparrow$ $s^{\ast}$ $\downarrow$ $\downarrow$ $\downarrow$ $\downarrow$ $p_{s}^{\ast}$ - $\uparrow$ - $\downarrow$ $p_{pr}^{\ast}$ $\downarrow$ $\uparrow$ $\downarrow$ $\uparrow$ Note: "$\uparrow$" represents "increasing", "$\downarrow$" represents "decreasing", and "-" represents irrelevance.
 Equilibrium decisions Exogenous parameters Monotoni- city on $\alpha$ Monotoni- city on $c_{1}$ Monotoni- city on $\sigma$ Monotoni- city on $\eta$ $p_{pm}^{\ast}$ - $\uparrow$ - $\uparrow$ $s^{\ast}$ $\downarrow$ $\downarrow$ $\downarrow$ $\downarrow$ $p_{s}^{\ast}$ - $\uparrow$ - $\downarrow$ $p_{pr}^{\ast}$ $\downarrow$ $\uparrow$ $\downarrow$ $\uparrow$ Note: "$\uparrow$" represents "increasing", "$\downarrow$" represents "decreasing", and "-" represents irrelevance.
The relationship between the demands ($D_{pm}$, $D_{pr}$, $D_{p}$, $D_{s}$) and exogenous parameters ($\alpha$, $c_{1}$, $\sigma$, $\eta$)
 Software and service demand Exogenous parameters Mono- toni- city on $\alpha$ Mono- toni- city on $c_{1}$ Mono- toni- city on $\sigma$ Monotonicity on $\eta$ $D_{pm}$ $\uparrow$ $\downarrow$ $\uparrow$ $\downarrow$ $D_{pr}$ $\downarrow$ $\downarrow$ $\downarrow$ $\downarrow$ $D_{p}$ - $\downarrow$ - $\downarrow$ $D_{s}$ - $\downarrow$ - $\downarrow, \text{if} ~~\left\{\begin{array}{l}1 / 2 <\eta <1, \\ (1-\eta) / \eta 1, \\ (1-\eta) / \eta  Software and service demand Exogenous parameters Mono- toni- city on$ \alpha $Mono- toni- city on$ c_{1} $Mono- toni- city on$ \sigma $Monotonicity on$ \eta  D_{pm}  \uparrow  \downarrow  \uparrow  \downarrow  D_{pr}  \downarrow  \downarrow  \downarrow  \downarrow  D_{p} $-$ \downarrow $-$ \downarrow  D_{s} $-$ \downarrow $-$\downarrow, \text{if} ~~\left\{\begin{array}{l}1 / 2 <\eta <1, \\ (1-\eta) / \eta 1, \\ (1-\eta) / \eta
The relationship between the profits ($\pi_{m}$, $\pi_{r}$, $\pi$) and the exogenous parameters ($\alpha$, $c_{1}$, $\sigma$, $\eta$)
 Profit Exogenous parameters Monotoni- city on $\alpha$ Monotoni- city on $c_{1}$ Monotoni- city on $\sigma$ Monotoni- city on $\eta$ $\pi_{m}$ - $\downarrow$ - $\downarrow$ $\pi_{r}$ $\downarrow$ $\downarrow$ $\downarrow$ $\downarrow$ $\pi$ $\downarrow$ $\downarrow$ $\downarrow$ $\downarrow$ Note: "$\uparrow$" represents "increasing", "$\downarrow$ " represents "decreasing", and "-" represents irrelevance.
 Profit Exogenous parameters Monotoni- city on $\alpha$ Monotoni- city on $c_{1}$ Monotoni- city on $\sigma$ Monotoni- city on $\eta$ $\pi_{m}$ - $\downarrow$ - $\downarrow$ $\pi_{r}$ $\downarrow$ $\downarrow$ $\downarrow$ $\downarrow$ $\pi$ $\downarrow$ $\downarrow$ $\downarrow$ $\downarrow$ Note: "$\uparrow$" represents "increasing", "$\downarrow$ " represents "decreasing", and "-" represents irrelevance.
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