How to Implement the Wholesale Price Contract: Considering Competition between Supply Chains

Abstract

In this paper, we develop the price competition model of two supply chains, in which each supply chain includes one core manufacturer and one retailer, respectively. The manufacturer in each supply chain sells products to the retailer through a commonly-used wholesale price contract. Each manufacturer has two options to implement the wholesale price contract: playing the Stackelberg game with the retailer and playing the bargaining game with the retailer. Based on the manufacturer’s two alternative performing modes in each supply chain, we consider four combined performing modes of two competitive supply chains in the model. By comparing equilibrium results, we find that when both manufacturers choose to bargain with retailers, the sales volume increases and the sales price decreases. Moreover, the manufacturers’ mode option is affected by bargaining power, product quality level, and the cost of improving product quality. Specifically, when both bargaining power and the cost of improving product quality are relatively small, both manufacturers choose to play Stackelberg game with retailers. When manufacturers’ bargaining power is sufficiently large, regardless of the cost of improving product quality, both manufacturers choose to bargain with retailers. Surprisingly, when the manufacturer chooses to bargain the wholesale price with the retailer, higher product quality is not always beneficial to the retailer because the retailer may have to share part of the cost of the manufacturer.

Keywords

Price competition / wholesale price contract / Nash bargain / Stackelberg game

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