Game modes and investment cost locations in radio-frequency identification (RFID) adoption

Abstract

We analyze the effect of game modes and investment cost locations on firms’ profits and their incentives to adopt Radio-Frequency Identification (RFID) technology. We consider a supply chain, where one manufacturer places an RFID tag on each item and sells through one retailer. The two firms can play the Stackelberg game or the Bargaining game. Specifically, under the Stackelberg game, the manufacturer dictates the wholesale price first (M) or the retailer moves first to announce the retail markup (R); under the Bargaining game, firms can bargain over the wholesale price only (O) or over both the wholesale price and quantity (B). Adopting RFID incurs both a variable cost and a fixed cost, which can be borne by the manufacturer or the retailer, respectively. Our results show that under B, whether the retailer or the manufacturer bears the fixed cost does not affect both firms’ profits. Surprisingly, under O, we observe that the retailer earns more when he bears the fixed cost than when he does not if his bargaining power is strong. Although the chain under B is perfectly coordinated, the retailer gains more under B than under O only when his bargaining power is strong. Furthermore, the retailer's incentive to adopt RFID is stronger under R than under M, and his highest affordable variable cost is higher than the manufacturer's when the fixed cost is ignored under R. Finally, both firms’ highest affordable fixed costs under R are higher than the centralized level when the variable cost is high.