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Competition in Multi-Echelon Distributive Supply Chains with Linear Demand

by Deming Zhou, Uday S. Karmarkar, Bo Jiang

ARTICLE | International Journal of Production Research | Vol. 53, 2015


Abstract


We studied competition in multi-echelon supply chains with a distributive structure. Firms in the supply chain are grouped into homogeneous sectors that contain identical firms with identical production capabilities that all produce exactly one undifferentiated product. Each sector may distribute its product to several different downstream sectors, and each sector is only supplied by a single upstream sector. The demand curves in final markets are assumed to be linear, as are the variable costs of production in all sectors. Competition is modelled via the successive Cournot model in which firms choose production quantities for their downstream market so as to maximise their own profits, given prices for the input. Under these assumptions, equilibrium prices, quantities and firm-level profits for any multi-echelon distributive network can be derived. We discuss the network transformation properties, and using these properties, we examine the effect of demand parameter changes and cost changes on any firm’s equilibrium price, quantity and profit. We also explore the effects of entry on the equilibrium solution. While the effects of upstream entry on downstream sectors are as expected, the effect of downstream entry on upstream sectors, and therefore on sectors in parallel (lateral) paths, can be quite counter-intuitive.