A Responsive-Pricing Retailer Sourcing from Competing Suppliers Facing Disruptions
Posted: 27 Jul 2017 Last revised: 26 Jun 2020
Date Written: July 23, 2017
Abstract
Problem definition: We study a problem of a retailer who orders from two competing strategic suppliers subject to independent or correlated disruptions and responds by setting the retail price upon delivery, which we call responsive pricing. The suppliers compete by setting their wholesale prices.
Academic/Practical Relevance: Supplier disruption correlation exists for reasons such as
product and service designs, geographic proximity, and common tier 2 suppliers. In practice, many
retailers are able to set the product price after knowing the delivered quantity.
Methodology: We model this problem as a Stackelberg-Nash game with the suppliers as the
leaders and the retailer as the follower, and obtain its equilibrium explicitly. We perform sensitivity
analyses with respect to suppliers' production costs, reliabilities, and their correlation.
Results: We find surprisingly that an increase in the reliability of a supplier may, counter to
our intuition, hurt him due to the competition between the suppliers selling to a responsive-pricing
retailer. Furthermore, in contrast to the literature, we find that under responsive pricing, a high
disruption correlation may benefit a supplier who has a cost advantage, and the total order quantity
may increase in that correlation due to supplier competition.
Managerial Implications: This paper has important implications for unreliable suppliers
because the way reliability and correlation influence their profits depends on the retailer's pricing
power and the competition intensity between the suppliers. With a responsive-pricing retailer, a
supplier may not benefit from a higher reliability but may benefit from a higher correlation. This
explains why a supplier with a cost advantage may have an incentive to create a positively correlated supply network by building plants in the geographic location of his competitor, or sourcing from the same tier 2 supplier to obtain a higher correlation strategically.
Keywords: Stackelberg-Nash Game, Disruption, Responsive Pricing, Competing Suppliers
JEL Classification: M11, C73
Suggested Citation: Suggested Citation