Service Investment and Channel Structure Decisions in Competing Supply Chains

Supply chain versus supply chain is an important aspect of business competition as the channel structure of each supply chain affects its own channel profit as well as the rival’s channel profit. Manufacturers have two distribution channel structure strategies: integrated channel and decentralized channel. The channel structure strategy can be influenced by price and service, two key competitive dimensions that affect both customer demand and firm profitability. The authors develop game-theoretic models to explore channel structure strategies for two manufacturers competing on price and service and examine how service provisions affect these strategies. Here, service can be provided by either producers (i.e., manufacturers) or sellers. When manufacturers provide service, this study reveals that symmetric decentralization (i.e., both manufacturers choosing a decentralized channel) is an equilibrium only when price elasticity, service cost, and service competition are low. When service is provided by sellers, symmetric decentralization is an equilibrium only when the retailer’s service cost is high and that of the manufacturer is low; otherwise, an asymmetric equilibrium may exist.