Equilibrium analysis of distribution channel structures under power imbalance and asymmetric information

Abstract

This paper investigates the problem of channel choice game in two power-imbalanced supply chains consisting of the leader supply chain and the follower supply chain. We assume that there exists symmetric and asymmetric cost information between the two supply chains, and that the two chains as well as the two members in each chain follow the Stackelberg game setting. We analyse four competition scenarios: both chains are decentralised, where individual members of both supply chains maximise their own profits by independently selecting their price policies; both chains are integrated, where manufacturers and retailers coordinate their decisions to maximise supply chain profits; the leader chain is decentralised and the follower integrated; the leader is integrated and the follower decentralised. The primary objective of this paper is to investigate the influence of power imbalance, information asymmetries, and the degree of product substitutability under channel choice equilibrium. We find that, in contrast to earlier literature where all manufacturers share equal or balanced decision-making power, an integrated distribution channel is the dominant strategy for the leader under symmetric and asymmetric information Stackelberg game. As the degree of product substitutability increases, the follower will gradually switch from integrated distribution channel to decentralised distribution channel; the follower can gain from constructing a decentralised distribution channel as the prediction accuracy of the leader increases.

Keywords:

• distributed manufacturing control
• game theory
• supply chain design

Acknowledgements

This research was supported in part by the National Natural Science Foundation of China under grant numbers 70971041, 71131003, and 71 072 165.