Strategies in supply chain competition: A game theoretic approach

Abstract

In competitive markets for substitutable products it is essential for firms to develop appropriate strategies to sustain competition. This research focuses on the strategies of quality production, product pricing and marketing efforts. The competition between substitutable products is modelled by considering two competing supply chains, each with a manufacturer and a retailer. A supply chain game is developed in which the two manufacturers move first and retailers move next. The horizontal competition between the two manufacturers is modelled as a simultaneous move game, similar is the case with the retailers. The vertical competition between the manufacturer and the retailer in each supply chain is modelled as a manufacturer led Stackelberg game in which the manufacturer optimally decides the quality level of production. The retailer responds by optimally deciding the retail price of the product and the extent of marketing efforts to be undertaken. The findings of this study indicate that the quality level of the product increases with competition intensity among the supply chains. Comparisons with the centralized setting and monopolistic markets are also performed. Finally the competition between supply chains in an environment of asymmetric information about the manufacturer’s cost for quality production is made.