Contract strategy in the presence of chain to chain competition

This paper studies contract strategy for two competing supply chains selling a substitutable product under demand uncertainty. Each supply chain consists of a risk neutral manufacturer and a risk averse retailer. As Stackelberg leader in each supply chain, each manufacturer needs to decide which type of contract to provide to its retailer, either a revenue sharing contract or a wholesale price contract. We identify the conditions under which each type of contract should be offered in a competitive market, and which type of contract is preferred by manufacturers only, or by both manufacturers and retailers. We show that wholesale price contracts may be a better choice than revenue sharing contracts for the manufacturers, to mitigate fierce chain-to-chain competition. Wholesale price contracts are preferred by the manufacturers over revenue sharing contracts when the price competition is moderate and demand variation is significant. A revenue sharing contract is the dominant choice for both the manufacturers and the retailers when the price competition is weak and demand uncertainty is low, as long as a revenue sharing ratio is negotiated in a proper range, a win-win outcome for all supply chain members.

Automated summary

This study examines the contract strategies for two competing supply chains selling substitutable products under demand uncertainty. It identifies the conditions under which each type of contract should be offered in a competitive market and which type of contract is preferred by manufacturers only or by both manufacturers and retailers. The findings suggest that wholesale price contracts may be a better choice to mitigate chain-to-chain competition, especially when there is moderate price competition and significant demand variation.