Supply Chain Expansion and Integration

Abstract

This paper studies expansion and integration of supply chains in which multiple suppliers sell products to multiple retailers through a wholesale market under uncertain consumer demand. We develop a novel model based on a market-game mechanism in which both suppliers and retailers influence a wholesale-market price. We show that when a supply chain expands to include more suppliers or more retailers (not both), the supply chain profit and efficiency increase. This result prescribes encouraging expansion, for instance, by introducing standardized information technologies or by reducing trade barriers. We then consider the integration of two local supply chains (e.g., an economic union such as the European Union (EU) Single Market Programme) after which suppliers of each local supply chain start transacting with retailers of the other one. We show that the profit of the integrated supply chain is larger than the sum of profits of local supply chains. However, integration may reduce the total profit of firms in a supply chain with a smaller ratio of suppliers to retailers than the other one. Our analysis suggests that the United Kingdom, which has a smaller ratio of suppliers to retailers than the EU, could enjoy greater supply chain profits on aggregate after disintegrating from the EU, while the EU may incur profit losses.