Supply Chain Contracting under Competition: Bilateral Bargaining vs. Stackelberg

Production & Operations Management, 22(3) 661-675, 2013

UNC Kenan-Flagler Research Paper No. 2013-26

29 Pages Posted: 16 Oct 2012 Last revised: 5 Apr 2016

See all articles by Qi Feng

Qi Feng

Purdue University - Krannert School of Management

Lauren Xiaoyuan Lu

University of North Carolina Kenan-Flagler Business School

Date Written: 2013

Abstract

We analyze contracting behaviors in a two-tier supply chain system consisting of competing manufacturers and competing retailers. We contrast the contracting outcome of a Stackelberg game, in which the manufacturers offer take-it-or-leave-it contracts to the retailers, with that of a bargaining game, in which the firms bilaterally negotiate contract terms via a process of alternating offers. The manufacturers in the Stackelberg game possess a Stackelberg-leader advantage in that the retailers are not entitled to make counteroffers. Our analysis suggests that whether this advantage would benefit the manufacturers depends on the contractual form. With simple contracts such as wholesale-price contracts, which generally do not allow one party to fully extract the trade surplus, the Stackelberg game replicates the boundary case of the bargaining game with the manufacturers possessing all bargaining power. In contrast, with sophisticated contracts such as two-part tariffs, which enable full surplus extraction, the two games lead to distinct outcomes. We further show that the game structure being Stackelberg or bargaining critically affects firms’ preferences over contract types and thus their equilibrium contract choices. These observations suggest that the Stackelberg game may not be a sufficient device to predict contracting behaviors in reality where bargaining is commonly observed.

Keywords: bilateral bargaining, Stackelberg game, competition, contracting

Suggested Citation

Feng, Qi and Lu, Lauren Xiaoyan, Supply Chain Contracting under Competition: Bilateral Bargaining vs. Stackelberg (2013). Production & Operations Management, 22(3) 661-675, 2013; UNC Kenan-Flagler Research Paper No. 2013-26. Available at SSRN: https://ssrn.com/abstract=2162230

Qi Feng

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Lauren Xiaoyan Lu (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building, CB#3490
Chapel Hill, NC 27599
United States

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/lul/index.htm

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