Multi-product supply networks: Implications of intermediaries

Abstract

We examine the implications of vertical augmentation – delegation and strategic decentralization – by involving an intermediary in a supply network of competing firms with limited supply capacity offering multiple product brands. We identify (i) the conditions for the competing firms to characterize their single- versus multi-product incentives, and (ii) the conditions for network sustainability. We develop a game-theoretic model to analyze equilibrium outcomes for competing firms in a decentralized network where the firms respond to horizontal and vertical competition in a multi-product setting. In examining the role of an intermediary in the network, we provide insights into the network setting from the perspectives of (i) consumer valuation for the firms’ products, (ii) size disparity between the network firms, (iii) the intermediary’s efforts in marketing and brand-building, and (iv) the network firms’ mandate for the intermediary. We show that vertical augmentation can be a viable alternative to manage the competing firms’ multi-product incentives, provided a suitable mandate is given to the intermediary. We highlight the importance of the marketing agent in managing the network firms’ multi-product incentives favorably when the firms’ supply capacities are quite disparate, and the consumer valuation for the shared product of the network is relatively high. Our work explores an alternate business model that is relevant for empowering small and micro-entrepreneurs in developing countries.