Bargaining within the Supply Chain and Its Implications in an Industry

Our main objective is to investigate the influence of the bargaining power within a chain on its industry. As a building block, we first discuss the implications of bargaining within a single chain by considering an asymmetric Nash bargaining on the wholesale price (BW). We show that both Manufacturer Stackelberg (MS) and VI strategies are special cases of the BW contract. We then develop the Nash equilibrium in an industry with two supply chains that use BW. We identify the profit-maximizing (coordinating) bargaining power within this industry. We show that when a chain is not monopolistic, Vertical Integration (VI) does not coordinate the chain and that the MS contract, where the manufacturer has all the bargaining power, is coordinating when competition is intense. Our results lead to several predictions supported by empirical findings, such as that in competitive industries chains will work “close to” the MS contract.