Impact of power structure on supply chain performance and consumer surplus

Abstract In this study, we consider a game theory based framework to model power in a supply chain with price‐dependent stochastic demand and to investigate how power structures (dominant retailer, dominant manufacturer, or balanced power) and demand models (expected demand and demand shock) affect supply chain efficiency, members’ profits, and consumer surplus. We analyze all of the problems in this framework and characterize their equilibrium outcomes. In comparison, we demonstrate that a firm often benefits from its power except that a power manufacturer might suffer in a supply chain with isoelastic demand and additive shock. A balanced power structure is often conducive to the whole supply chain, but this structure might not perform very well in a supply chain with isoelastic demand and additive shock. Power structures and demand models act on consumers in much the same manner that they do on supply chain efficiency. In other words, consumers often prefer a balanced power structure and thereby do not profit from power retailers. Additionally, we find that the retail price can play a pivotal role in determining supply chain efficiency and consumer surplus. Specifically, the lower the retail price, the higher the supply chain efficiency and consumer surplus. In contrast, the service level has a less preeminent influence on both of them.