Supply Chain Competition with Multiple Manufacturers and Retailers

Abstract

We study competition in a supply chain where multiple manufacturers compete in quantities to supply a set of products to multiple risk-averse retailers who compete in quantities to satisfy the uncertain consumer demand. For the symmetric supply chain, we give closed-form expressions for the unique equilibrium. We find that, provided there is a sufficiently large number of manufacturers and retailers, the supply chain efficiency (the ratio of the aggregate utility in the decentralized and centralized chains) can be raised to 1 by inducing the right degree of retailer differentiation. Also, risk aversion results in triple marginalization: retailers require a strictly positive margin to distribute even when they are perfectly competitive, because otherwise they are unwilling to undertake the risk associated with the uncertainty in demand. For the asymmetric supply chain, we show how numerical optimization can be used to compute the equilibria, and we find that the supply chain efficiency may drop sharply with the asymmetry of either manufacturers or retailers. We also find that the introduction of asymmetric product assortment reduces the degree of competition among retailers and thus has an effect similar to that of reducing the number of retailers. We show that, unlike in the symmetric chain, the asymmetric chain efficiency depends on product differentiation and risk aversion because of the interaction between these features and the asymmetry of manufacturers and retailers.

Horizontal Mergers in Multitier Decentralized Supply Chains

“…Majumder and Srinivasan (2008) study the effects of contract leadership on the efficiency of multitier supply chains and analyze competition between separate supply chains. In a two-tier supply chain with multiple manufacturers and retailers, Adida and DeMiguel (2011) study the effects of product and retailer differentiation, stochastic demand, and retailer risk aversion on the decentralized supply chain equilibrium and its efficiency. Recently, Adida et al (2012) study the role of intermediation in a supply chain where retailers lead.…”

The effect of supplier capacity on the supply chain profit

“…(1) We show what might at first seem like a "counter intuitive" result, namely that supplier B's profit at the equilibrium is not monotonically increasing with her capacity level, i.e. increasing her capacity level (even at no cost) may yield lower profits at equilibrium, and hence it may be beneficial for this supplier to lower its capacity.…”

“…Of particular interest is measuring how "inefficient" the decentralized supply chain becomes due to lack of coordination among the tiers of the supply chain as well as due to competition at each tier. Supply chain efficiency has been 2 studied in a variety of settings and with different focuses, including: one supplier and one retailer [43,34,27] two or more suppliers and one retailer [29,28,12,8,37], one supplier and multiple retailers [4,5,9,37], multiple suppliers and multiple retailers [1], oligopolistic competition [16], complementary vs. substitute products [33], bullwhip effect [11]. To the best of our knowledge, the effect of capacity on supply chain efficiency has not been addressed in the current literature.…”

Preferences for contractual forms in supply chains

“…DeMiguel and Xu (2009) develop an equilibrium analysis of a multiple-leader and multiple-follower oligopoly game with stochastic demand. Adida and DeMiguel (2011) consider supply chain competition with uncertain demands and risk-averse decision makers. Federgruen and Hu (2012) study sequential oligopolies in supply chains featuring multiple echelons and firms that engage in price competition with other firms of the same echelon as well as in vertical competition across echelons.…”