Coordinating a two-echelon supply chain under production disruption when retailers compete with price and service level

Business competition among the individual retailers in a supply chain is a common event, and it plays an important role in making supply chain decisions. In a newsvendor setting, this paper investigates a supply chain system with a sole manufacturer who may face a production disruption, and two independent retailers who compete each other with price and service level. The demand at each retailer is random but influenced by the prices and service levels of both the retailers. We formulate the decentralized system as a manufacturer-Stackelberg game and characterize the equilibrium behaviour of the system. We further show that a wholesale price discount scheme can coordinate the supply chain and achieve win-win outcome. A numerical example is given to illustrate the theoretical results and study the impact of production yield due to production disruption on the performance of the supply chain.