Tuesday, September 30, 2014

Competition and Fragmentation in Supply Chains

Alex Nikulkov, Stanford Graduate School of Business and Hau L. Lee, Stanford Graduate School of Business have a new paper on Competition and Fragmentation in Supply Chains.

ABSTRACT: Supply chains rarely have tiers consisting of single firms - much more common are competitive environments in which there are multiple parties on both supply and demand sides. Classical supply chain literature has focused on describing simple supply chains, consisting of a single supplier and a single retailer. We fill in the gap by considering a supply chain with multiple suppliers and multiple retailers.
Our model has single period and normally distributed demand. Suppliers are actively competing on inventory (hence competition), while retailers are splitting a fixed retail market (hence fragmentation). Wholesale price is determined endogenously as a price that equates supply and demand.
We show that competition helps to align the supply chain by reducing double marginalization. Fragmentation increases effective demand variance, but under certain conditions it can increase supply chain profit by making retailers more price-sensitive and inducing lower wholesale price. Our findings highlight the importance of endogenous specification of wholesale price.


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