The Implications of Competition on Strategic Inventories Considering Manufacturer-to-Consumer Rebates

Abstract

In a one-to-one manufacturer-to-retailer supply chain, the retailer will hold strategic inventories to force the manufacturer to reduce its wholesale prices. In response, the manufacturer can issue manufacturer-to-consumer rebates to curb the wholesale prices. These aggressive behaviors surprisingly improve the supply chain members’ performance. However, these conclusions are always drawn under the assumption that horizontal competition does not exist. In this paper, we examine the effects of horizontal competition on equilibrium decisions in two typical supply chain structures, considering strategic inventories and manufacturer-to-consumer rebates. For the supply chain consisting of one manufacturer and two retailers, our results indicate that consumer rebates and strategic inventories can still benefit manufacturers, retailers, and consumers alike by alleviating double marginalization. However, the restriction on holding costs becomes harsher than that in a one-to-one supply chain. For a supply chain consisting of two manufacturers and one retailer, the improving effect of manufacturer-to-consumer rebates that alleviate double marginalization is weakened as upstream competition intensifies. When the upstream competition is intensive, the improving effect disappears, and the manufacturers prefer situations where manufacturer-to-consumer rebates and strategic inventories are nonexistent.