Impact of decision sequence of pricing and quality investment in decentralized assembly system

Abstract

The quality and price of suppliers’ products directly influence the potential demand in the market. This paper studies the impact of decision sequence in a two-echelon assembly system with demand uncertainty: suppliers first decide wholesale price and quality investment for their components, and then the manufacturer decides product price after the uncertainty in demand is resolved. We consider three scenarios in the stage of suppliers’ decisions. In case 1, both suppliers simultaneously determine quality investment followed by the simultaneous setting of wholesale prices. In case 2, both suppliers make quality investment and wholesale price decisions simultaneously. In case 3, one supplier acts as a leader and moves first to announce quality investment and wholesale price, and the other supplier moves later. We compare all decision models from each firms’ perspective. Our analysis reveals that the second decision sequence is the best option for the manufacturer and the integrated supply chain and the first decision sequence is the best option for suppliers as a whole, but there is no clear dominating choice for each supplier. The optimal choices of suppliers are mainly determined by the cost structure. We examine and discuss the relation between system parameters and the incentives of suppliers in choosing decision sequence.