Competition and coordination in a three-tier supply chain with differentiated channels

Abstract

Motivated by the recent trend in global sourcing and multi-channel strategies, we analyze a supply chain in which a manufacturer distributes a product through two distributors (channels) to a retailer whose demand is uncertain. The two distributors differ in terms of their commitment to offering return credits, and they compete by charging different wholesale prices to the retailer. For this dual-channel supply chain, we derive the retailer’s optimal ordering policy, characterize the pricing equilibrium for the two distributors, and investigate the manufacturer’s optimal pricing strategy. We show that the dual-channel system benefits the manufacturer and the retailer if the level of demand uncertainty exceeds a threshold and that the competition between the two distributors leads to the coordination of the downstream supply chain (the two distributors and the retailer). We further demonstrate that the introduction of a second channel may entail Pareto gains for all players, including the incumbent distributor, compared to a single-channel system. This insight sheds some light on the increasing prevalence of dual channels in practice. The differentiation of the two channels is the key to the success of the dual-channel system.