Strategic Response to a Powerful Downstream Retailer: Difference-Setting Wholesale Pricing Contract and Partial Forward Integration

Abstract

We study a supply chain consisted of a supplier and both retailers, and the supplier sells a single product through a dominant retailer and a weak retailer. The aggressive bargaining behavior of the dominant retailer brings the supplier much concern and two feasible strategies are presented to respond to that: difference-setting wholesale pricing contract and integration with the weak retailer. We investigate the decisions of supply chain members under each solution and find that, compared to the traditional form, the supplier always benefits from announcing the difference-setting wholesale pricing contract for it not only raises the marginal wholesale profits of both channels but also reduces the market share of the dominant retailer, thus potentially weakening its channel power. In addition, we show that combining with the weak retailer is not a wise choice for suppliers when the dominant retailer with relatively little bargaining power enjoys a large market share. Finally, by comparing the equilibria of these two solutions, we find that the optimal choice for suppliers depends not only on the difference in market share but also on the dominant retailer’s bargaining power in the negotiation.

Keywords

Channel power / bargaining / wholesale-price contract / forward integration

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