Competing Manufacturers in a Retail Supply Chain: On Contractual Form and Coordination1

It is common for a retailer to sell products from competing manufacturers. How then should the …rms manage their contract negotiations? The supply chain coordination literature focuses either on a single manufacturer selling to a single retailer or one manufacturer selling to many (possibly competing) retailers. We …nd that some key conclusions from those market structures do not apply in our setting. We allow the manufacturers to compete for the retailer’s business using one of three types of contracts, a wholesale-price contract, a quantity-discount contract or a two-part tari¤. It is well known that there are two reasons why a monopolist manufacturer prefers either of the latter two, more sophisticated, contracts relative to the wholesale-price contract. First, they can be used to coordinate the supply chain, meaning that they induce the retailer to sell more because they reduce the double marginalization caused by wholesale-price contracts. Second, they can be used to extract rents from the retailer, in theory allowing the manufacturer to leave the retailer only with her reservation pro…t. However, we show that in our market structure these two sophisticated contracts force the manufacturers to compete more aggressively than when they only o¤er wholesale-price contracts, and this may leave them worse o¤ and the retailer substantially better o¤. In other words, although in a serial supply chain a retailer may have just cause to fear quantity discounts and two-part tari¤s, a retailer may actually prefer those contracts when o¤ered by competing manufacturers. We conclude that the properties a contractual form exhibits in a one-manufacturer supply chain may not carry over to the realistic setting in which multiple manufacturers must compete to sell their goods through a single retailer. The authors would like to thank Awi Federgruen, Leslie Marx and Richard Staelin for helpful discussions.