Cost-sharing mechanism for product quality improvement in a supply chain under competition

Abstract

For the growing competition in the modern sophisticated business environment, there is an increasing trend to launch new products or to improve the quality of the end products in order to attract more consumers. But the rising costs or uncertainties for this innovation require firms to collaborate with each other. In this paper, we study how a retailer and each of two competing manufacturers can be benefited by collaborative product quality improvement strategies in a supply chain. In our model, two competing manufacturers invest in the quality improvement of their respective product and a common retailer sells those higher quality substitutable products to the end consumers. To incentivize the manufacturers in product quality improvement initiatives, we address cost-sharing mechanisms between the retailer level and the manufacturer level. To focus on the importance of collaborative product quality improvement, we study the quality improvement initiatives both in collaborative and non-collaborative scenarios. Through game-theoretic framework, we address mainly three different contract scenarios: (1) WP contract in which both manufacturers accept wholesale price contract, (2) CSC contract in which both manufacturers accept cost-sharing contract, and (3) WC contract in which only one manufacturer accepts cost-sharing contract and the other accepts wholesale price contract. Depending on the mechanism how the retailer decides its cost-sharing proportion with the manufacturer, we further develop and analyze two models of cost-sharing for each of CSC and WC contracts. Our results show that both cost-sharing contracts result in higher quality improvement levels and higher profits in the supply chain as compared to WP contract. In addition, the retailer can enhance his profit level by reducing the differentiation between retail prices (intense price competition) of two products. On the contrary, both manufacturers can sufficiently increase their profit levels by raising the differentiation between two products with respect to quality (lower quality competition). We further investigate those scenarios in which the retailer would be interested in sharing more quality investment costs with the manufacturers.