Contract strategy in the presence of chain to chain competition

Haixia Zhao, Jing Chen and Xingzheng Ai

International Journal of Production Research, 2022, vol. 60, issue 6, 1913-1931

Abstract: This paper studies contract strategy for two competing supply chains selling a substitutable product under demand uncertainty. Each supply chain consists of a risk neutral manufacturer and a risk averse retailer. As Stackelberg leader in each supply chain, each manufacturer needs to decide which type of contract to provide to its retailer, either a revenue sharing contract or a wholesale price contract. We identify the conditions under which each type of contract should be offered in a competitive market, and which type of contract is preferred by manufacturers only, or by both manufacturers and retailers. We show that wholesale price contracts may be a better choice than revenue sharing contracts for the manufacturers, to mitigate fierce chain-to-chain competition. Wholesale price contracts are preferred by the manufacturers over revenue sharing contracts when the price competition is moderate and demand variation is significant. A revenue sharing contract is the dominant choice for both the manufacturers and the retailers when the price competition is weak and demand uncertainty is low, as long as a revenue sharing ratio is negotiated in a proper range, a win-win outcome for all supply chain members.

Date: 2022
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DOI: 10.1080/00207543.2021.1876945

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