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Strategic wholesale pricing in a supply chain with a potential entrant
Authors:Tiaojun Xiao  Xiangtong Qi
Institution:1. School of Management Science and Engineering, Nanjing University, Hankou Road 22, Nanjing, Jiangsu 210093, China;2. Department of Industrial Engineering and Logistics Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Abstract:This paper develops an adverse selection model for a two-stage supply chain with one supplier, one retailer, and a potential outside entrant supplier who makes a partially substitutable product. The work is different from most research on entry deterrence that only considers a single-stage model. Our main interest is to investigate how the incumbent supplier can strategically maximize her profit by a wholesale pricing policy when facing the potential entrant. We focus on a model where the entrant supplier will sell her product through the same incumbent retailer. We derive the optimal decisions for each player and study the comparative statics of the equilibrium. To investigate how the supply chain structure may affect the deterrence strategy of the incumbent supplier, we also consider three alternative models with different channel structures, when both suppliers sell their products directly, when the entrant has another independent retailer, and when the entrant sells her product directly. Through the comparison, we find that the existence of the common downstream retailer often enhances the deterring motivation of the incumbent supplier.
Keywords:Supply chain management  Wholesale pricing  Entry deterrence  Adverse selection  Game theory
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