Quality improvement in a supply chain with horizontal competition

Supply quality management is becoming an important part of a manufacturer‟s work with suppliers, and has recently received significant attention from researchers. This paper focuses on a supply chain system that consists of a supplier and two competing manufacturers, examines quality strategies in different cooperative mechanisms and investigates the effects of different cooperative mechanisms on channel members‟ profits. A modified Nerlove-Arrow model is employed to describe quality levels on goodwill and sales of products. Utilizing differential game theory, we calculate and compare the equilibrium quality decisions and profits of all channel members in three different scenarios; that is, (i) each channel member makes decisions with a non-cooperative program; (ii) each channel member makes decisions with a cooperative program; (iii) the supplier cooperates with a manufacturer as a joint venture. Our analysis reveals that the traditional cooperative mechanism is not very effective in the horizontal competitive market. Finally, it is noted that each channel member can obtain an extra benefit if a transfer payment exists.