Equilibrium contract selection strategy in chain-to-chain competition with demand uncertainty

Yaner Fang, Yao-Yu Wang and Zhongsheng Hua
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Yaner Fang: Post-doctoral Workstation, Bank of Communications, Shanghai, China
Yao-Yu Wang: Dongwu Business School, Soochow University, Suzhou, China
Zhongsheng Hua: School of Management, Zhejiang University, Hangzhou, China

Journal of the Operational Research Society, 2016, vol. 67, issue 5, 770-785

Abstract: This paper investigates the equilibrium contract selection problem for the dominant suppliers in two competing supply chains with stochastic and price-sensitive demand. The two suppliers, acting as the Stackelberg leaders, produce substitutable products and distribute them through each exclusive retailer, and can provide either a consignment contract or a wholesale-price contract. The equilibrium behaviours of the suppliers and retailers are investigated in three different scenarios: (1) the consignment contract scenario; (2) the wholesale-price contract scenario; and (3) the hybrid contract scenario. We prove that the equilibrium contracting strategy is of the threshold type: when the cost-share rates of the two retailers are above certain thresholds, both suppliers select consignment contracts; when the cost-share rates of the two retailers are lower than certain thresholds, both suppliers select wholesale-price contracts; when one retailer’s cost-share rate is above a certain threshold and the other is lower than a certain threshold, the supplier with large retailer’s cost-share rate selects the consignment contract and the other supplier with small retailer’s cost-share rate selects the wholesale-price contract. Furthermore, these thresholds depend on price sensitivities.

Date: 2016
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