Pricing and alliance selection for a dominant retailer with an upstream entry

Abstract

Abstract We consider the problem of pricing and alliance selection that a dominant retailer in a two-echelon supply chain decides when facing a potential upstream entry. The two-echelon supply chain consists of a dominant retailer, an incumbent supplier and an “incursive” vendor, where both the incumbent supplier and “incursive” vendor sell substitutable products to the common market through the dominant retailer. Our objective is to discuss whether the dominant retailer should sell the “incursive” vendor's products and, if so, how the dominant retailer strategically selects the alliance structure to maximize his/her own profit. We also present how all the members make their pricing decisions and analyze the impact of competitive intensity between two products on their pricing strategies after the entry of the vendor in possible alliance settings. Our results show that: (1) the introduction of the upstream vendor always benefits the retailer, and more interestingly, benefits the incumbent suppler in many cases, too; (2) in this paper, we define the competitive ability as the price dominance of one player over another when both are competing for the same customer market, if the price competition between the incumbent supplier and the “incursive” vendor is relatively fierce, the dominant retailer should ally with the one who has a relatively strong competitive ability rather than the other who has a relatively weak competitive ability; otherwise, he/she should ally with both upstream members. Finally, using numerical examples, we analyze the impact of different parameters and provide some management insights.