Impacts of demand uncertainty on retailer's dominance and manufacturer-retailer supply chain cooperation

Abstract

Recent studies in marketing and distribution channels have shown that the balance of power between manufacturers and retailers is shifting. Based on this observation, we investigate a two-echelon supply chain with a manufacturer and a retailer in this paper. We first develop retailer-dominant non-cooperative game models by introducing a sensitivity of retailer's order quantity to manufacturer's wholesale price; then we analyze two cooperative scenarios, in which the Nash bargaining model is utilized to implement profit sharing between the manufacturer and the retailer. Under the assumption that the manufacturer and the retailer are risk-neutral, we find that the manufacturer and the retailer can bargain to cooperate at any level of retail-market demand uncertainty with exogenous retail price. However, the cooperation is conditional on retail-market demand uncertainty with endogenous retail price: it can be implemented if the fluctuation of retail-market demand is relatively small, and the measure of retail-market demand uncertainty does not exceed an upper bound. Theoretical and numerical analyses show that the retailer's dominance over the manufacturer increases with the increase in the sensitivity of retailer's order quantity to manufacturer's wholesale price under a limitation of retail-market demand uncertainty. Numerical analyses also show that the retailer's dominance decreases with the increase in retail-market demand uncertainty.