A numerical study on competing supply chains: a price-setting newsvendor model

Abstract

Consider an industry with two competing two-echelon supply chains. Each supply chain consists of one manufacturer and one retailer. Each retailer is modelled as a price-setting newsvendor. That is, each retailer sets his inventory as well as retail price. In such a setting, we numerically study the impact of horizontal competition and demand uncertainty on wholesale and retail prices, inventories, manufacturer profit, retailer profit, and supply chain profit. Demand uncertainty is captured by an additive stochastic demand function in which the random shock is uniformly distributed. Three key findings are: 1) horizontal competition could be beneficial for both manufacturer and retailer; 2) it is possible for retailer to optimally keep less inventory when demand uncertainty increases, provided that horizontal competition is much intense; 3) inventory (and thus order quantity) is an effective tool for retailer to transfer much of demand risk to manufacturer.