The effect of forward integration on a single-vendor–multi-retailer supply chain under retailer competition

Abstract

This paper studies a single-vendor–multi-retailer supply chain and considers the case where the vendor merges with one of its retailers. After the merger, the vendor supplies products to the market both through a direct (integrated) sales channel and through the remaining retailers. Different types of competition are considered for the retailers, namely volume competition, price competition, and no competition. The operations policies of the vendor and the retailers are considered explicitly in this paper by taking account of inventory carrying, setup and ordering costs that result from production and ordering decisions. We compare the pre-merger situation to the situation after the merger and show under which conditions the merger is beneficial to the vendor, the retailers, the supply chain, and the consumers. The results of our paper indicate that the type of competition is of major importance for the structure of the supply chain after the merger, and that under certain conditions, the merger may benefit all parties involved, i.e. the vendor, the retailers, and the consumers.