A dynamic supply chain game with vertical coordination and horizontal competition

Abstract

AbstractThis paper introduces a dynamic game modeling several interfaces between marketing and operations under vertical coordination and horizontal supply chain (SC) competition. An SC has a one‐manufacturer‐one‐retailer structure and competes against a symmetric SC. In each SC, the manufacturer decides both the production volume and the advertising efforts, while the retailer controls both the purchasing volume and the selling price. Firms within each SC can manage their business by adopting either a wholesale price contract (WPC) or a revenue‐sharing contract (RSC). In general, an SC can achieve coordination when shifting from a WPC to an RSC. Nevertheless, this is no longer true when SC competition exists. We show that an RSC is beneficial only when the rival SC uses a WPC. In fact, when both SCs adopt an RSC, the general advantages gained through coordination vanish and both SCs are operationally and economically worse off.