Competition and Coordination in a Two‐Channel Supply Chain

Abstract

We study competition and coordination in a supply chain in which a single supplier both operates a direct channel and sells its product through multiple differentiated retailers competing in quantities. We study analytically the supply chain with symmetric retailers and find that the supplier generally prefers to have as many retailers as possible in the market, even if the retailers' equilibrium retail price is lower than that of the supplier, and even if the number of retailers and their cost or market advantage prevent sales through the direct channel. We find that the two-channel supply chain may be subject to inefficiencies not present in the single-channel supply chain and study coordination. We show that several contracts known to coordinate a single-channel supply chain do not coordinate the two-channel supply chain; thus we propose a linear quantity discount contract and demonstrate its ability to perfectly coordinate the two-channel supply chain with symmetric retailers. We provide some analytical results for the supply chain with asymmetric retailers and propose an efficient solution approach for finding the equilibrium. In a numerical study of the asymmetric chain we find that the supplier still benefits from having more retailers in the market and that linear quantity discount contracts can mitigate supply chain inefficiency, though they no longer achieve perfect coordination.

Supplier’s Joint Investments in Cost Reduction and Quality Improvement in a Decentralized Supply Chain

“…Some current studies on decentralized supply chains state that, due to the fact that the well known double marginalization [29] exists in decentralized supply chains, the optimal retail price in the decentralized setting is higher than that in the centralized setting (see, e.g., [30,31]). Our finding shows that when the upstream supplier makes investments to reduce its production cost and improve its product quality, the optimal retail price in the decentralized setting may or may not be lower than that in the centralized setting.…”

Competition Policy and Antitrust Law: Implications of Developments in Supply Chain Management

“…Research on multi-channel management (Herhausen, Binder, Schoegel & Herrmann, 2015;Rangaswamy & Van Bruggen, 2005), multi-channel distribution (Dutta, Bergen, Heide & John, 1995;Nunes & Cespedes, 2003;Perdikaki & Swaminathan, 2013), dual distribution (Huang & Swaminathan, 2009;David & Adida, 2015;Khouja, Pan, & Zhou, 2016;Chen, Liang, Yao, & Sun, 2017), omni-channel retailing (Zhang et al, 2010;Murfield, Boone, Rutner & Thomas, 2017;Wang, Hua, Wang, & Lai, 2017;Barwitz & Maas, 2018), retail management (Neslin & Shankar, 2009), and consumer-based SCM (Christopher & Gattorna, 2005;Ericsson, 2011;Gattorna, 2010;Godsell, Diefenbach, Clemmow, Towill & Christopher, 2011;Hjort, Lantz, Ericsson & Gattorna, 2013;Peinkofer, Esper, Smith & Williams, 2015;Stolze, Mollenkopf & Flint, 2016) documents developments in the management of distribution. Related research on cross-channel shopping (Hjort et al, 2013;Kumar & Venkatesan, 2005;Zhang et al, 2010), free riding (Bernstein et al, 2009;He, Xiong & Lin, 2016;Luo, Li & Cheng, 2016;Xing & Liu, 2012), and its manifestation through showrooming (Balakrishnan et al, 2014;Basak et al, 2017) examines the interplay of consumer shopping behavior and distribution strategy.…”

Pricing policies for a dual-channel retailer with cross-channel returns

“…Considerable research works have analyzed systems that contain a manufacturer that sells a single product to customers through both a manufacturer or supplier-owned online store and an independent retail store(s). Several different types of competition take place between the two channels, including competition in price (David, and Adida 2015;Balakrishnan, Sundaresan and Zhang 2014;Ryan, Sun and Zhao 2013), competition in services (Dan, Xu and Liu 2012), and competition in product availability (Takahashi et al 2011;Chiang and Monahan 2005). Existing literature shows that decentralized systems are a representation of a situation wherein each channel seeks to maximize its own profit in the presence of cannibalization (David, and Adida 2015;Ryan, Sun and Zhao 2013;Dan, Xu and Liu 2012;Huang, Yang and Zhang 2012;Chen, Zhang and Sun 2012;Hua, Wang and Cheng 2010).…”

“…In a coordinated or centralized duopolistic system, each player maximizes its own profit. However, it is done within the boundaries of a contract (David, and Adida 2015;Ryan, Sun and Zhao 2013;Chen, Zhang and Sun 2012). A fully coordinated or centralized monopolistic system uses a sole decision maker to maximize the system's total profit (Huang, Yang and Zhang 2012;Hua, Wang and Cheng 2010).…”