Merger strategies in a supply chain with asymmetric capital-constrained retailers upon market power dependent trade credit

Abstract

Merger and acquisition activities, which are increasing in both deal volume and value, are believed to be profitable. However, a merger is not always the best option. To investigate participants’ preferences regarding merger strategies, we consider a supply chain consisting of one supplier and two asymmetric capital-constrained retailers; in this chain, the supplier and two retailers vertically interact in a Stackelberg game, while the two retailers compete horizontally in a Cournot game. Through investigating the impacts of merger effects and the retailers’ market power on each player's optimal decision and post-merger supply chain performance, we find that when merger effects perform well, the supplier prefers that the two retailers merge horizontally if their market power does not vary significantly, while it would prefer to merge with the large retailer if the market power of the two retailers varies greatly. Conversely, when merger effects perform poorly, the supplier prefers that all players maintain their independence. Moreover, the larger retailer will seek a horizontal merger when merger effects perform well, and will prefer to merge with the small retailer in the occasion of poor merger effects and balanced market power. However, if the large retailer possesses significantly more market power than the smaller retailer, the most beneficial outcome is that all members operate independently. Furthermore, a horizontal merger benefits the small retailer most. Surprisingly, we find a Pareto zone that produces a multi-win result when all players prefer a horizontal merger.