Competition and coordination for supply chain networks with random yields

We consider a two-echelon supply chain network where the downstream retailers procure products from the upstream unreliable suppliers to sell in the end market. In the decentralized setting, the suppliers consider whether to enter the market and simultaneously set their wholesale prices if they enter, and then the retailers make ordering decisions and engage in quantity-based Cournot competition in the end market where each retailer can sell exactly the products purchased from the supplier. We analyze the system as a Stackelberg game where the suppliers are the leaders and the retailers are the followers. For the case where the random yields of the suppliers are independent, we derive the unique equilibrium of the game in which the suppliers with higher reliability set higher wholesale prices and obtain more profits. We then coordinate the supply chain with the spanning revenue-sharing (SRS) contract and derive the conditions under which the SRS contract achieves the win-win outcome, i.e., all the members of the supply chain network sign a single revenue-sharing contract together. Then considering the case where the random yields are correlated, we show that some suppliers may not join the game in equilibrium even if all the suppliers have the same purchasing cost. Moreover, we show that a high correlation of supplier defaults dampens suppliers’ competition, which differs from the finding in the extant literature because we consider price-sensitive demand.