Competition in Supply Chain with Service Contributions

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Charoensiriwath, Chayakrit
Lu, Jye-Chyi
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We study the supply chain with two manufacturers producing competing products and selling them through a common retailer. The two manufacturers must decide on the wholesale price and the level of service they plan to provide to the consumer. Each firm are assumed to optimize only its own profit (uncoordinated). The consumer demand depends on two factors: (1) retail price, and (2) service level provided by the manufacturer. We extend the study on this basic model in three directions. First, we explore the role of bargaining power in supply chain strategic interactions. We derive and compare equilibrium solutions for the supply chain under three different scenarios (e.g., Manufacturer Stackelberg, Retailer Stackelberg, and Vertical Nash). Second, we extend the framework to study multi-period model. In this model, demand also depends on the past period retail prices and service levels, as well as current prices and service levels. Game-theoretic approaches and dynamic system and control theory are used as tools to model the problem. Finally, we examine a single period problem with stochastic demand. When demand is uncertain, the retailer faces a newsvendor-type problem. In our model, the newsvendor must manage two competing products against a price-dependent demand. We derive an expression for the newsvendor's optimal retail prices. Next, we provide an algorithm to search for the equilibrium wholesale price and service level, given that the manufacturers know the retailer's reaction function. Some numerical examples are provided.
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