Co-production strategy, retail competition, and market segmentation

Abstract

Purpose The purpose of this paper is to examine the effect of manufacturers’ co-production strategy on market segmentation and channel performance under retail competition. Design/methodology/approach It differs from previous empirical studies by primarily focusing on the increment in consumer value accompanying co-production. The authors establish a game-theoretical model to analyze the impact of co-production on market segmentation and the profitability of channel members in a competitive retail environment. Findings The results reveal that manufacturers introducing co-production expand market coverage and benefit all channel members, when the intensity of competition is sufficiently high, especially for retailers with low-quality levels, who are out of the market without co-production. Furthermore, with the increase in customer valuation through co-production, employing a co-production strategy is always a dominant strategy for manufacturers. Research limitations/implications First, although the authors assume a monopoly manufacturer and two duopoly retailers, adding competition between manufacturers should enrich the model. Multiple products with vertical or horizontal differentiation could also be introduced into the model. Second, the authors use the multiplicative utility function to model the value co-creation effect on consumers; however, different utility functions may yield significantly different results and implications. Third, the authors model a one-shot game in a single product selling period; future studies may employ multi-period games to obtain further insight into co-production strategy. Finally, the model assumes that all consumers are homogenous in the extent of value creation and hassle cost. Future research may find it interesting to consider heterogeneity in these characteristics. Practical implications The business world today already sees the power of leadership in a supply chain to have shifted from manufacturers to retail giants such as Walmart, Home Depot and Best Buy. The findings also propose a new route to counteract the emergence and rise of dominant retailers. On the other hand, with the application of new technology in the retail industry such as 3D avatar, AR/VR, Internet of Things, consumers are more likely to participate in various forms of co-production activities, how to execute the co-production strategy has become more and more important for managers. Social implications The conclusion of this study points out the way to achieve a win–win outcome under which both channel members including manufacturer and retailers and consumers can be better off, that is, the channel can reach Pareto improvement, so the social welfare is increased accordingly. Originality/value The authors propose an analytical framework to examine the effects of co-production and competition on market segmentation and profitability, and prove that co-production is a powerful marketing tool that can attract consumers and increase profitability, which manufacturers can incorporate into their products even in a competitive environment.

Encroachment in a three-echelon supply chain: manufacturer encroachment or distributor encroachment

“…The main stream of the literature on this topic focuses on whether and when encroachment could benefit downside retailers. Conventional wisdom indicates that upside firm encroachment in supply chains benefits the encroacher by competing directly with its end-retailers in the market, but it harms the endretailers by creating competition (Hendershott and Zhang, 2006;Liu and Zhang, 2006;Pan, 2018;Du et al, 2018;Wang and Fan, 2020). For example, Pan (2018) examined encroachment under the framework of a two-part tariff contract and showed that when a monopoly manufacturer supplies competing retailers and contracts are offered secretly, encroachment may aggravate double marginalization in supply chains, thereby leading to increased unit prices.…”

Opaque selling vs traditional selling: optimal decisions for service providers in a competitive market

“…For example, Wang et al (2022) used the Stackelberg game to describe the channel members' decision sequence in a three-echelon supply chain. Also, Wang and Fan (2020) stablished a game-theoretical model to analyze the profitability of channel members in a competitive retail environment. Du et al (2018) took the Stackelberg game to model the interaction between the service providers.…”

Supply chain channel conflict coordination with consumer network acceptance

“…In this system, channel members, for the purpose of the maximization of their profits, will make decisions in favor of themselves according to their strength, scale and ability to serve consumers, which will inevitably bring about the amplification, delay and shock of demand information in the channel. Even the irrational behavior of the members of the supply chain system will lead to serious channel conflicts (Wang and Fan, 2019; Li et al , 2019a, b; Lu and Chen, 2013; Du et al , 2018), affect interfirm relations, and greatly reduce the efficiency of the entire supply chain. At the same time, for the consumers' demand, they often have different psychological price expectations because of the difference in the acceptance of network channels, which leads to the conflict between the network direct sale channel and the offline traditional retail channel.…”