Competition and Coordination in a Two-Channel Supply Chain

We study competition and coordination in a supply chain in which a single supplier both operates a direct channel and sells its product through multiple differentiated retailers competing in quantities. We study analytically the supply chain with symmetric retailers and find that the supplier generally prefers to have as many retailers as possible in the market, even if the retailers’ equilibrium retail price is lower than that of the supplier, and even if the number of retailers and their cost or market advantage prevent sales through the direct channel. We find that the two-channel supply chain may be subject to inefficiencies not present in the single-channel supply chain and study coordination. We show that several contracts known to coordinate a single-channel supply chain do not coordinate the two-channel supply chain; thus we propose a linear quantity discount contract and demonstrate its ability to perfectly coordinate the two-channel supply chain with symmetric retailers. We provide some analytical results for the supply chain with asymmetric retailers and propose an efficient solution approach for finding the equilibrium. In a numerical study of the asymmetric chain we find that the supplier still benefits from having more retailers in the market and that linear quantity discount contracts can mitigate supply chain inefficiency, though they no longer achieve perfect coordination.