Retail outsourcing strategy in Cournot & Bertrand retail competitions with economies of scale

Abstract

<p style='text-indent:20px;'>This paper investigates a manufacturer's retail outsourcing strategies under different competition modes with economies of scale. We focus on the effects of market competition modes, economies of scale and competitor's behavior on manufacturer's retail outsourcing decisions, and then we develop four game models under three competition modes. Firstly, we find the channel structure where both manufacturers choose retail outsourcing cannot be an equilibrium structure under the Cournot competition. The Cournot competition mode is less profitable to the firm than the Bertrand competition when the products are complements. Secondly, under the hybrid Cournot-Bertrand competition mode, there is only one equilibrium supply chain structure where neither manufacturer chooses retail outsourcing, when the substitutability and complementarity levels are not sufficiently high. In addition, setting price (quantity) contracts as the strategic variables is the dominant strategy for the direct-sale manufacturer who provides complementary (substitutable) products. Thirdly, both competitive firms will benefit from the situation where they choose the same competition mode. When the products are substitutes (complements), both of them choose the Cournot (Bertrand) competition mode. Finally, we show that the economies of scale have little impact on the equilibrium of the outsourcing structure but a great impact on the competition mode equilibrium.</p>