Effects of product substitutability and power relationships on performance in triadic supply chains

With the development of the retail industry and the increasing complexity of the power relationship between common retailers and manufacturers, research on product substitutability has become increasingly critical for operational management and decision-making regarding substitutable products. We investigated the effects of product substitutability on retail prices, profits, and social welfare for a triadic supply chain comprised of a retailer and two competing manufacturers. We then extended our analysis to the Nash bargaining game to evaluate the impact of product substitutability and bargaining power on equilibrium in a multiunit bilateral negotiation. The findings revealed that product homogeneity can harm the profits of manufacturers and the overall supply chain. In contrast, product substitutability’s impact on the profits of retailers depends on the inter-firm power relationship. Moreover, the retailer’s profit was found to consistently increase with respect to substitutability in a manufacturer Stackelberg model, but not so in the vertical Nash and retailer Stackelberg models. We also explored the effect of power structure on supply chain performance. Our results provide valuable insights that can help manufacturers and retailers decide on pricing, sourcing, and brand positioning to improve economic and social performance, as well as assist the government in deciding whether product differentiation should be encouraged.