PAPER 2 -Two-echelon supply chain models: Considering

duopolistic retailers’ different competitive behaviors

TYPE OF MODEL: Hypothetical
ENTITIES: 2 retailers and 1 manufacturer
SUMMARY:
It considers a two-echelon supply chain consisting of a monopolistic manufacturer
selling its product through two duopolistic retailers. The manufacturer sets a
wholesale unit price to the two retailers. Subsequently, the two duopolistic retailers
sharing a common marbet respond independently by setting the sale price and the
corresponding order quantity. Notations are as follows:
pi: the sale price charged to customers by retailer I where i=1, 2
Pi: retailer-i’s profit
PM: the manufacturer’s profit
w: the wholesale price per unit charged by manufacturer;
c: unit manufacturing cost
Qi: deterministic demand faced by retailer-i or quantity ordered by retailer-i
RT: the ratio of the manufacturer’s profit to the total profit of the duopolistic retailers.
Demand function is downward facing as:
Qi=(Di-ai*pi+b*pj) where i,j=1,2
where parameters Di>0, ai>0 and 0<b<ai. Di is the demand facing retailer-i if prices
are zero.b is the degree of substitutability between retailers
SCENARIO:
Finding their Cournot solution, i.e., each retailer independently set his retail price and
order quantity by assuming his rival’s sale price as a parameter.
SOLUTION:
P1= (p1-w)*Q1=(p1-w)*(D1-a1*p1+b*p1) (1
P2=(p2-w)*Q2=(p2-w)*(D2-a2*p2+b*p1) (2
Thus, retailer-1 will maximize P1 with respect to p1, treating p2 as a parameter, and
retailer-2 will maximize P2 with respect to p2, treating p1 as a parameter.
Optimal order quantities after determining p1 and p2 for individual maximum profits
are:
Q1*=D1 + [a1*b*(D2+a2*w)+(b^2-2*a1*a2)(D1+a1w)]/(4*a1*a2-b^2) (3
Q2*=D2 + [a2*b*(D1+a1*w)+(b^2-2*a1*a2)(D2+a2*w)]/(4*a1*a2-b^2) (4
Eqn. 1 and 2 show the optimal reaction functions of the two duopolistic retailers for
any w set by the manufacturer.The manufacturer bnows the retailers’ reaction
functions for any w-value she sets. Hence the manufacturer’s profit will be
PM=(w-c)(Q1*+Q2*) (5)
Solving dPM/dw=0 will give the optimal wholesale price set by the manufacturer as:
It is derived that the sign of the second-order derivative of PM with respect to w is
the same as the sign of R1, where
R1=b^2(a1+a2)-2a1*a2*(a1+a2) + 2*a1*a2*b. (6)
Reorganizing the terms of the right-hand side of (6) will give
R1=(y2-a1*a2)*(a1+a2)+a1*a2*[2*b-(a1+a2)] (7)
w=c/2-[2*a1*a2(D1+D2)+b*D1*a2+b*D2*a1]/(2R1) (8)
RESULTS:
Combining (8) with (1),(2) and (3) and (4)–(5) will easily yield the optimal policies and
the corresponding profits of the manufacturer and the duopolistic retailers.