Horizontal cooperation strategies for competing manufacturers in a capital constrained supply chain

Many studies concentrate on the vertical collaboration between upstream and downstream enterprises in the supply chain. However, we have observed that some competing manufacturers also engage in horizontal collaboration in practice, where they hold minority ownership shares in their rival, especially for those with limited initial capital. Although such collaboration has become increasingly prevalent, achieving the expected effects remains challenging due to frequent conflicts in collaboration mechanisms. This study considers a two-echelon supply chain with one supplier and two manufacturers with different financial statuses, where manufacturer 2 not only engages in Cournot competition with manufacturer 1, but also offers a horizontal collaboration contract as a collaborator. By incorporating the initial capital of manufacturer 1, we develop a benchmark sufficient capital model, and two other models such as capital constrained model and the horizontal collaboration model. The impact of horizontal cooperation on the optimal decisions of manufacturers is analyzed to investigate whether a collaboration strategy exists that can mitigate these conflicts while improving the profits of all participants. We prove that the horizontal collaboration can benefit both manufacturers when manufacturer 1 is highly capital constrained and holds a large equity share in itself. However, collaborating with a competing manufacturer 2 does not always benefit the capital-constrained manufacturer 1 compared to a situation where both manufacturers have sufficient capital, but it can increase the profits of manufacturer 2 and the entire supply chain in certain conditions. There exists an optimal collaboration mechanism that can achieve a win–win situation, where manufacturer 2 transfers partial payments to the capital-constrained manufacturer 1. The transfer payment is influenced by the cost differences between the manufacturers and the shareholding ratio. These findings can provide valuable management insights to enable competitors to adopt the optimal collaboration method in the face of capital constraints.