Intermediation and Competition in Retailer-Driven Global Supply Chains*

To understand the joint impact of horizontal and vertical competition on supply chain intermediation, we propose a model of competition in a three-tier supply chain where intermediaries compete to mediate between competing retailers and capacity-constrained suppliers. We argue that in retailer-driven global supply chains it is more realistic to model the retailers as Stackelberg leaders, and show that as a result intermediaries prefer products for which the supplier base (existing production capacity) is neither too narrow nor too broad. We also find that the right balance of horizontal and vertical competition can entirely offset the double marginalization effect caused by the existence of an additional tier of intermediaries, and thus lead to supply chain efficiency. Nevertheless, we find that any regulatory intervention aimed at improving efficiency must be carefully tailored to the structure of the specific supply chain. Finally, on accounting for intermediaries’ private information about the supply side, we find that surprisingly, under certain scenarios retailers could potentially be better off, relative to the case with complete information.