Supply chain coordination with contracts game between complementary suppliers

This paper studies a supply chain consisting of two suppliers and an assembler who also acts as a retailer in a single period model. The suppliers provide complementary modules to the assembler and the latter assembles the final products and sells them to meet a stochastic demand. Each supplier can improve his performance by offering a return policy to the assembler while the best contract depends on that offered by the other supplier. We show that the non-cooperative contracts game between the firms has a unique and stable equilibrium in which the optimal return policies happen to fully coordinate the whole channel. Moreover, the suppliers still have the rights to negotiate with the assembler independently to share their profits properly. With such properties, the suppliers are encouraged to offer return policies to the assembler by following a simple rule derived from the favorable equilibrium, which will lead to a win-win-win situation.