Supply chain performance and consumer surplus under alternative structures of channel dominance

Supply chain partnerships exhibit varying degrees of power distribution among the agents. This has implications for pricing and operational decisions in the channel and eventually influences the end customers. To understand how different power schemes affect the supply chain partners’ performance and consumer surplus, we study channel structures with a dominant manufacturer, a dominant retailer, and no single-agent dominance. Under random and price sensitive demand, channel dominance is interpreted in our setting as exerting power to determine the retail and wholesale prices as well as to transfer the inventory risk to the weaker party. We analyze all problems in a game-theory based framework and characterize the equilibrium retail price, wholesale price, and order/production quantity. We show that the manufacturer-dominated channel structure leads to the highest production quantity, the lowest retail price, and the largest expected surplus for an individual buyer; on the other hand, the entire channel profit and the total consumer surplus are highest when the retailer holds the channel dominance. While both the manufacturer and the retailer are better off when they become a power agent individually, channel dominance does not always guarantee higher share of channel profits, as we show under the manufacturer-dominated structure. Further insights are derived analytically and numerically from comparisons of the manufacturer/retailer dominance schemes with the no single-agent dominance structure and integrated channel. We also study extensions to investigate the effect of demand model and risk sharing, and we address industry settings with alternative schemes of holding cost, shortage penalty and salvage value.