Competitive Supply Chain Strategies in the Retail Sector

Abstract

In response to increasing competition, quick response (QR) and vertical integration are commonly used strategies in the retail industry to gain competitive edge. While the benefits of these strategies have been well studied in a monopoly setting, their value under competition has received less attention. It is therefore essential to understand the competitive value of these strategies. In the first chapter, we investigate the value of an additional in-season replenishment opportunity provided by QR in a supply chain with a manufacturer serving two competing retailers. We find offering QR to only one of the ex-ante symmetric retailers may be the optimal policy for a manufacturer, rather than offering QR to both of them or refraining from offering it at all. Moreover, we show QR may prove detrimental to a retailer when retail competition is taken into account. In the second chapter, we examine the value of vertical integration for a manufacturer under channel competition. We build a model with two competing supply chains, each with a supplier, a manufacturer and a retailer. The manufacturer considers three strategies: (1) forward integration, (2) backward integration, and (3) no integration. We show backward integration benefits a manufacturer while forward integration can be harmful to it. For manufacturers’ competitive choice of integration strategy, we find manufacturers encounter prisoner’s dilemma: every manufacturer chooses to vertically integrate, making them and the entire channel worse off than they would be if none of them vertically integrate. Finally, vertical integration can result in a better quality product sold at a lower price. In the third chapter, we examine the impact of having strategic customers on firms’ profitability and the performance of the entire channel. Interestingly, we show that having strategic customers benefits a supplier from higher sales. It also benefits a retailer when a product is sufficiently, but not overly, fashionable. The total supply chain profit can be higher with strategic customers. A decentralized channel with strategic customers can perform better than a centralized one with strategic customers or a decentralized one with myopic customers. That is, decentralized decision making and having strategic customers can improve channel performance.