Competition in Multi-Channel Supply Chains (2011)

ABSTRACT Consider a multi-channel supply chain (hereafter SC) system, producing and distributing two substitutable products. Within this framework, we compare and contrast price and quantity competition strategies, and study how the disparity between the two strategies changes with the degree of product substitutability. It is shown that price competition and quantity competition is not equivalent. Neither strategy is superior for all SC configurations discussed in this paper. The disparity between price and quantity competition increases when product substitutability increases. (ProQuest: ... denotes formulae omitted.) INTRODUCTION Two strategies of market competition have been widely observed in SC systems. One strategy is price competition which is often defined as Bertrand competition in economics literature. The other is quantity competition which is typically defined as Cournot competition in economics. In price competition, prices are often compelled to marginal cost while in quantity competition positive price-cost margins are often achieved. Distribution channel structure has been another major strategic concern for SC system. Many distribution channels have been observed ranging from traditional retail channel to the direct sales model and the clicks-and-mortar channel (Gap/Gap.com, Staples/Staples.com etc.). The contracting arrangement between a manufacturer and a retailer also varies from channel to channel. Some manufacturers use an exclusive arrangement with a retailer while others use multiple channels. The direct channel is a vertically integrated channel often controlled by a manufacturer (Dell, for example). The efficiency of a decentralized SC system is defined as the ratio of its total equilibrium profit to the optimal profit of the centralized system. The objective of this paper is to study the disparity of SC efficiencies between price competition and quantity competition. To that end, consider two substitutable products, produced either by a single manufacturer or by two manufacturers. The products are sold through utmost two retailers. Within this framework, consider different SC arrangements ranging from a centralized configuration to several decentralized multi-channel ones. The decentralized configurations include the single retailer channel (two manufacturers, each producing one product; both sell their products through a single retailer), the single manufacturer channel (one manufacturer, two retailers), and the exclusive channel (two manufacturers and two retailers; each manufacturer sells through only one retailer and each retailer carry only one product). This paper is intended to answer the following questions. Does price competition result in the same efficiencies for SC configurations as quantity competition? Is one competition strategy always superior to the other one? How does product substitutability affect competition strategies? Many of the channel arrangements described above are observed in practice. The factory outlets and the direct distribution channels are the typical examples of centralized SC between a manufacturer and a retailer. The exclusive channel is most often observed in manufacturerdistributor relationships in various industries ranging from chemicals and paper to appliances and Beer. For example, Hercules Inc. is the exclusive distributor for GE Specialty Materials' water treatment solutions to the paper industry (Challener, 2003); Diego Suarez is the exclusive distributor of Coors brand of beers in Puerto Rico (Allio & Allio, 2002). The Wall Street Journal (October 28, 2003) reports that Estee Lauder has created a new company division, called BeautyBank, to develop cosmetic products exclusively for Kohl's (Merrick & Beatty, 2003). Different auto makers often sell vehicles through a single dealer in smaller cities, giving rise to a distribution channel similar to the single retailer channel noted above. Wu et al. …