How power structure and markup schemes impact supply chain channel efficiency under price-dependent stochastic demand

Abstract

Although considerable attention has been separately given to factors such as power structures, price-dependent demand, and markup pricing schemes, there has been limited exploration of the combined effects of these factors on supply chain efficiency and the leader’s advantage. We propose a game theoretic model in which a manufacturer sells a single product to a newsvendor retailer who sets both optimal order quantity and selling price under uncertain price-dependent demand. Furthermore, we examine a supply network wherein a single retailer fulfills orders using a global manufacturer for regular orders and a local manufacturer to clear any shortages. Through numerical analysis, we show that the retailer always prefers to charge a percentage markup. In a two-player game, channel efficiency is higher when the retailer is the leader under linear demand; however, under iso-elastic demand, the manufacturer being a leader brings a higher channel efficiency. When a local manufacturer is involved as a second manufacturer, channel efficiency is higher when the retailer remains a follower, as this induces more fierce wholesale price competition between the two manufacturers. Additionally, when demand uncertainty is high in the two-player game with linear demand, the retailer as a follower can achieve higher profits, whilst high uncertainty under iso-elastic demand decreases both players’ profits. Moreover, it becomes advantageous for the retailer to have a local manufacturer as demand uncertainty increases, even when the local manufacturer announces the wholesale price first.