Asymmetric relationships with symmetric suppliers: Strategic choice of supply chain price leadership in a competitive market

Abstract

This study investigates a supply chain member's strategic choice between price leadership and price followership against each of its supply chain partners. In particular, our investigation focuses on whether a retailer ever has an incentive to have asymmetric price leadership types across multiple suppliers even in the absence of asymmetry across them in demand, cost, and competitive pricing behavior. By analyzing a game-theoretic model composed of two manufacturers and one common retailer, we show that the retailer does not always prefer price leadership over a manufacturer, and that the retailer's strategic choice over price leadership with one manufacturer depends upon its price leadership type with the competing manufacturer and the degree of product substitutability. Surprisingly, although the competing manufacturers are completely symmetric in demand and cost characteristics, if the retailer does not have price leadership over one manufacturer, it prefers being a price leader over the other manufacturer when the product substitutability is sufficiently low, resulting in an asymmetric price leadership despite no asymmetry between the manufacturers. On the other hand, higher degrees of product substitutability lead the retailer to choose not to seek price leadership against either manufacturer. In contrast, each manufacturer always finds it profitable to be a price leader over the retailer, regardless of product substitutability and the price leadership situation between the retailer and the competing manufacturer. These strategic choices over vertical price leadership reflect interesting interplays of product positioning, the supply chain members’ pricing objectives, and their foresights of other supply chain members’ pricing behavior.