Supplier wholesale pricing for a retail chain: Implications of centralized vs. decentralized retailing and procurement under quantity competition

We consider pricing decisions for a supplier who sells a product via a retail chain with localized retail stores throughout a region. The retail chain can influence the competition for channel profit between its retail stores and the supplier via its procurement strategy. Retail store orders may be horizontally decentralized or centrally managed by the retail chain, depending on the chain׳s ordering strategy. In the case of decentralization at the retail stage, the chain may prefer to coordinate procurement from the supplier to achieve better pricing terms. We model this problem as a Stackelberg game between the supplier and the retail chain and its stores, under joint ownership of the retail chain. When the retail stores are horizontally decentralized, they engage in quantity competition in the regional market. Given the supplier׳s pricing decisions, we analyze the retail chain׳s procurement strategy and store order quantity decisions. Then, the store order quantities are used to solve the supplier׳s wholesale price setting problem. These analyses then determine the equilibria of the Stackelberg game between the supplier and the retail chain under the leadership of either party. Our results indicate that the retail chain will have a first mover advantage, while the supplier might in certain cases gain a first mover disadvantage. Furthermore, the profit-maximizing strategy for the channel may in some cases require the supplier׳s leadership, while in other cases, the retail chain׳s leadership maximizes channel profit.