Channel efficiency and retailer tier dominance in a supply chain with a common manufacturer

We consider a two-tier supply chain with manufacturing as the upstream tier and retailing as the downstream tier. We focus on investigating the impact of the retailers’ competition vis-à-vis their relative positioning within the retailing tier on the performance of the supply chain. Further, we develop a stylized game-theoretic model, where a manufacturer is the leader, while multiple competing retailers are its followers. We look to generate three distinct supply chain structures by varying the positioning (tier dominance) of one retailer with the other retailer(s): (i) simultaneous setting, (ii) sequential setting, and (iii) cooperative setting. Our analysis reveals some interesting insights regarding the impact of these distinct supply chain structures on channel efficiency. For instance, we find that the supply chain becomes the most efficient under the sequential setting. The economic rationale behind this non-intuitive result is rooted in how retailers’ relative positioning in the retailing tier interacts with double marginalization. Additionally, our results suggest that retailers’ tier dominance leads to a “win-win” outcome where both the supply chain and consumers are better off. Under the sequential setting, we determine the optimal number of tier-dominant retailers while maximizing channel efficiency. Finally, using numerical studies, we investigate the impact of the degree of product substitution on channel efficiency, whereby, we find that, under the simultaneous setting, channel efficiency monotonically increases in the degree of product differentiation, which essentially is not always monotone in the sequential setting. We also demonstrate how the power imbalance between retailers complements the theory of countervailing power.