Radio-frequency identification (RFID) adoption with inventory misplacement under retail competition

Abstract

We investigate RFID adoption strategies in a decentralized supply chain with one manufacturer and two competing retailers both of whom face inventory misplacement problems. If a retailer adopts RFID, his misplacement problem is resolved. Retailer 1 is a Stackelberg leader in the retail market and Retailer 2 is a follower. The two retailers sequentially make decisions on whether or not to adopt RFID. After that, the manufacturer offers a wholesale price contract to a non-RFID adoption retailer or a cost-sharing contract to an RFID adoption retailer, and delivers products with(without) RFID tags to the RFID (non-RFID) adoption retailer. The two retailers then sequentially determine their retail prices to engage in price competition. We fully characterize the equilibrium on RFID adoption, contracts and retail prices. It is shown that the equilibrium RFID adoption strategies depend on the competition intensity, misplacement rates, and RFID tagging cost. We highlight the strategic role of RFID adoption in a competitive market: when the unit RFID tagging cost is intermediate, the two retailers use differentiated RFID adoption strategies such that exactly one of them adopts RFID. With more intense competition, a retailer can be more likely to adopt RFID, identifying competition as a key driving force of RFID adoption. Both retailers adopting RFID cannot be an equilibrium when the competition intensity is low. If only one retailer adopts RFID technology, he pays the manufacturer the same price for an RFID-tagged item regardless of whether or not the other retailer adopts the technology.