Research on Vertical Integration of Supply Chains in Uncertain Environments Based on Newsvendor Model

Vertical integration is widely regarded as a strategy to mitigate the effects of uncertainty in supply chains. This paper investigates the decision-making patterns and their implications under various vertical integration modes. The price-setting newsvendor model is adopted to capture the competitive interaction between two retailers at the horizontal level, while wholesale contracts between upstream and downstream firms are considered on the vertical dimension. Within this framework, the paper analyses the dynamics and effects of vertical integration on supply chain performance. Results indicate that the vertical integration between the supplier and manufacturer enables the integrated firm to meet the retailer’s order with a lower production plan. When the retailer engages in vertical integration, the integrated firm can achieve improved performance by coordinating market demand with production activities while managing multiple sources of uncertainty. This paper concludes that, under uncertain conditions, vertical integration transforms the contractual mechanism that binds supply and demand into intrafirm operational coordination. Although increased uncertainty amplifies operational volatility, the reduction in transaction costs and gains in coordination efficiency contribute significantly to overall operational effectiveness.