We study models of interaction between upstream and downstream agents in a supply chain for a single product with imperfect quality, in a competitive market. Specifically, consider a retailer who can buy a product from several suppliers.
Suppliers generally differ in the quality and the wholesale price of the product offered.
For example, he can require that they make offers both on the wholesale price and the inspection rate, after which he makes a supplier choice. Alternatively, the retailer may first require only price offers, with the understanding that, once a supplier is selected, further negotiations will take place regarding the product quality. We develop game theoretic models for these alternative types of contracts, and compare them in terms of their impact in retailers profitability, equilibrium wholesale price, and average quality reaching the end customer.