Retailer's vertical integration strategies under different business modes

Abstract

Currently, increasingly more retailers wish to gain a competitive advantage through vertical integration. We consider a three-echelon supply chain comprising a retailer, a service supplier, and a manufacturer. The service supplier is responsible for the service level, and the manufacturer is responsible for product quality. The retailer has two business modes: reseller mode and platform mode. The retailer chooses one of three strategies, i.e., no vertical integration, forward integration, or backward integration, for these two business modes. By comparing the retailer's equilibrium profit under these vertical integration strategies, we obtain the optimal choice for the retailer and a high profit for the supply chain under different business modes. Moreover, we characterize the effects of the proportional fee, product quality, service level and business mode on vertical integration. We find that the cost effect is determined by product quality and service level and that the income distribution effect is determined by the proportional fee. The cost effect is a key factor affecting the retailer's vertical integration strategy under the reseller mode, and both of these effects jointly affect the retailer's choice under the platform mode. Furthermore, we design a cost-sharing contract to improve vertical integration efficiency and investigate the effect of vertical integration decisions on improvement strategies. Lastly, we consider an extension to analyse the effect of an endogenous proportional fee on retailers' vertical integration strategies.