Quantity leadership in dual‐channel supply chains with production economies or diseconomies

Abstract This study examines a dual‐channel supply chain in which a manufacturer sells products through both a downstream retailer and its own direct channel. The manufacturer first sets the wholesale price, after which the two firms engage in one of three quantity competition games: a simultaneous‐move game, a manufacturer‐as‐leader game, or a retailer‐as‐leader game. We investigate how production economies or diseconomies of scale influence the quantity leadership and followership decisions of supply chain parties. We find that stronger economies of scale may hurt both the manufacturer and the retailer, while stronger diseconomies of scale can improve profitability for both parties. The quantity leadership structure plays a critical mediating role in these effects. We also show that a retailer leadership equilibrium emerges endogenously when diseconomies of scale are present or when the level of economies of scale is sufficiently low, whereas a manufacturer leadership equilibrium prevails when the level of economies of scale is high. Furthermore, we show that endogenous leadership choices, particularly when the manufacturer becomes the leader, can reduce consumer surplus and social welfare. These findings offer managerial implications for strategic decisions in dual‐channel supply chain management.