Downstream firm’s investment with equity holding in decentralized assembly systems

Abstract

We consider a decentralized assembly system in which n upstream firms sell complementary components to a downstream firm facing a multiplicative stochastic demand. The downstream firm may make an investment to hold equity in an upstream firm. This not only enables the downstream firm to share the profit of the upstream firm as determined by the equity held, but also provides the needed resources for the upstream firm to improve its production efficiency and consequently benefits the entire supply chain system. We characterize the equilibrium pricing and production decisions of all members in such a supply chain, under any given investment strategy of the downstream firm. Furthermore, we derive the optimal investment strategy for the downstream firm. We find that the investment by the downstream firm helps reduce the retail price and increase the production quantity. We consider two distinct decision settings: upstream Stackelberg and downstream Stackelberg, to examine the impacts on the profits of all chain members by the investment decision of the downstream firm. Finally, we check the robustness of key results by considering additive stochastic demand, other two compensation schemes, capacity constraint, and a new downstream Stackelberg setting, respectively, and obtain some useful insights.