Price and service competition between two leader-follower retailer-Stackelberg supply chains

Competition among supply chains is an essential factor to be considered in determining supply chain strategies. Furthermore, due to an imbalance in market share, one of the supply chains may have a higher power to manipulate the market and usually play the role of the leader in the market. In this paper, two leader-follower supply chains consisting of one manufacturer and one retailer are considered. In-chain competition is addressed besides the chain-to-chain competition in which the retailer is the leader and the manufacturer is the follower. The competition elements are price and service, which are investigated in three different scenarios: decentralized leader-decentralized follower, integrated leader-decentralized follower, and decentralized leader-integrated follower. Using the backward induction, we start the solving process from the follower supply chain and derive the follower’s best response function. Then the leader strategies are examined after the substitution of the follower’s best response function in leader profit function. Finally, we analyze the effects of the price competition intensity, service investment coefficient, and the potential market size of both chains on the equilibrium values in all three scenarios. The results show that increasing the price competition intensity will decrease the profit of the leading supply chain. In contrast, small values of price competition intensity are beneficial for the follower supply chain. Further, the first scenario has the most retail and wholesale price while the integrated supply chains have the most service level.

Keywords:

Supply chain , price competition , service competition , Stackelberg game