Reservation Profit Levels and the Division of Supply Chain Profit∗

We address the problem of supply chain performance when the retailers have bargaining power. In particular, in a supply chain with one supplier selling to multiple competing retailers, we investigate the effect of retailer bargaining power in the allocation of total supply chain profit among all channel members. We model a retailer’s bargaining power through its ability to set reservation profit levels. In this environment, we show that supply chain performance is not maximized and, in some cases, one or more retailers are excluded from trade with the supplier. In equilibrium, retailers’ choices of reservation profit levels may induce the supplier to trade only with a strict subset of the retailers, even when all retailers must be included in order for channel profit to be maximized. ∗The authors would like to thank participants at the 2004 Annual INFORMS Conference in Denver, at the Fourth Annual Florida Supply Chain Conference, as well as seminar participants at Stanford University. They would also like to thank Paul Zipkin and Tunay Tunca for helpful discussions. †The authors can be reached at the Fuqua School of Business, Duke University, Durham, NC 27708, [email protected], [email protected].