Partial vertical centralization in competing supply chains

Abstract

A great amount of research has been done on whether a supply chain should be centralized or decentralized. With a centralized supply chain, a manufacturer can sell directly to the consumers or fully own the downstream retailer. With a decentralized supply chain, the manufacturer and the downstream retailer make decisions to optimize their own interests. However, most existing research assumes a firm must choose between complete centralization (CC) and complete decentralization (CD), which is inconsistent with the common business practice of partial vertical centralization (PVC). That is, a firm may hold an ownership share in another firm in the same supply chain. In this paper, we fill this research gap in the literature by studying PVC in two supply chains each with a manufacturer and a retailer competing with substitutable products. The product substitutability levels of 0 and 1 correspond to independent products and perfect substitutable products, respectively. Our analysis and results prove that PVC is the equilibrium channel structure until the substitutability level is above a threshold , where CD becomes the equilibrium channel structure. Moreover, we re-examine PVC under an alternative demand model and confirm that our analytic results and managerial insights are robust. In short, our research can help explain and justify the commonly adopted but rarely studied business practice of PVC.