Multilateral Bargaining and Downstream Competition

Abstract

We examine multilateral bargaining in vertical supply relationships which involve an upstream manufacturer who sells through two competing retailers to end consumers. In these relationships the negotiations are inter-dependent and a bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important.The manufacturer may negotiate simultaneously with the retailers or sequentially with one retailer at a time. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. This observability of the existence of a prior agreement in the case of sequential negotiations can endogenously affect the bargaining externality. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices (and profitability) are similar, while sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price, and exclusively supply only the retailer who charged a relatively high retail price and maintain high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition.

The Perils of Group Purchasing in a Competing Supply Chain

“…The second stream of related researches addresses the implication of bargaining on the allocation and level of supply chain pro ts. As is the case in our paper, some recent studies have considered bargaining contracts rather than take-it-or-leave-it price o ers [6][7][8][9][10][11], which has been the case in previous models of channel interaction [12]. As Lovejoy [13] pointed out, a bargaining model would be more appropriate in many supply chain contexts, because the solutions derived from the Stackelberg framework can be highly impractical because of various issues.…”

“…More recently, Guo and Iyer [11] studied a multiunit bilateral bargaining and downstream competition in a two-tier supply chain where market competition takes place before ex-post negotiations. Their study is focused on bargaining timing and determines the rms' equilibrium decision whether bargaining concurrently or sequentially.…”

The Effect of Bidimensional Power Structure on Supply Chain Decisions and Performance

“…Taking in consideration of different channel power structures, Pan et al [36] examined different contract strategies in a triadic supply chain network. Guo and Iyer [22] analyzed multilateral bargaining in a supply network that consists of two rival retailers and a common manufacturer. In their study, the effects of the timing of negotiations on the bargaining externality across the retailers and the price competition are investigated.…”

Leadership, Dominance, and Preeminence in a Channel Structure with a Common Retailer

“…Researchers (e.g., Marx & Shaffer, ; Nagarajan & Bassok, ) have studied timing and sequencing in several negotiation contexts, but typically with retail prices that are exogenous and hence with known demand quantities. In contrast, explicitly incorporating echelon dominance in the retail tier in a context with two retailers (one dominant and the other weak) and a single manufacturer, Guo and Iyer () examine the manufacturer's choice of simultaneously versus sequentially negotiating with the two retailers. Building on this literature, we examine if the common retailer in our context can sequence the pricing discussions to its advantage.…”