Strategic Wholesale Pricing and Commonality Strategy in a Supply Chain with Quality Segmentation

Abstract

We develop two game models of a one-supplier and one-manufacturer supply chain to investigate the supplier’s strategic wholesale pricing decision and the manufacturer’s commonality strategy. The manufacturer has three commonality strategies for the high-end and low-end products: common high-quality component, common low-quality component, and dedicated components. We consider both wholesale price first scenario and commonality strategy first scenario. Under the wholesale price first scenario, we identify the range of each commonality strategy and find that (i) the common low-quality component strategy is harmful to the supplier; (ii) if the quality of low-quality component and the unit production cost of high-quality component are sufficiently low, the supplier induces the common high-quality component strategy by strategically decreasing the unit wholesale price of high-quality component, while if they are sufficiently high, the supplier induces the dedicated components strategy by increasing the unit wholesale price of high-quality component and decreasing that of low-quality one. Under the commonality strategy first scenario, the common low-quality component strategy may exist. By comparing the two scenarios, we find that (i) if the unit production cost of low-quality component is medium, the equilibrium outcomes under both scenarios are identical; (ii) there exists a first-mover advantage for the two players.