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Competing Manufacturers in a Retail Supply Chain: On Contractual Form and Coordination

Author

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  • Gérard P. Cachon

    () (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • A. Gürhan Kök

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

It is common for a retailer to sell products from competing manufacturers. How then should the firms manage their contract negotiations? The supply chain coordination literature focuses either on a single manufacturer selling to a single retailer or one manufacturer selling to many (possibly competing) retailers. We find that some key conclusions from those market structures do not apply in our setting, where multiple manufacturers sell through a single retailer. We allow the manufacturers to compete for the retailer's business using one of three types of contracts: a wholesale-price contract, a quantity-discount contract, or a two-part tariff. It is well known that the latter two, more sophisticated contracts enable the manufacturer to coordinate the supply chain, thereby maximizing the profits available to the firms. More importantly, they allow the manufacturer to extract rents from the retailer, in theory allowing the manufacturer to leave the retailer with only her reservation profit. However, we show that in our market structure these two sophisticated contracts force the manufacturers to compete more aggressively relative to when they only offer wholesale-price contracts, and this may leave them worse off and the retailer substantially better off. In other words, although in a serial supply chain a retailer may have just cause to fear quantity discounts and two-part tariffs, a retailer may actually prefer those contracts when offered by competing manufacturers. We conclude that the properties a contractual form exhibits in a one-manufacturer supply chain may not carry over to the realistic setting in which multiple manufacturers must compete to sell their goods through the same retailer.

Suggested Citation

  • Gérard P. Cachon & A. Gürhan Kök, 2010. "Competing Manufacturers in a Retail Supply Chain: On Contractual Form and Coordination," Management Science, INFORMS, vol. 56(3), pages 571-589, March.
  • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:3:p:571-589
    DOI: 10.1287/mnsc.1090.1122
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    File URL: http://dx.doi.org/10.1287/mnsc.1090.1122
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    References listed on IDEAS

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