Product variety strategies for vertically differentiated products in a two-stage supply chain

Abstract

In this paper, we study how the presence of coordination, competition and cost structures affect the product variety and pricing decisions in a two-stage supply chain. We consider vertically differentiated industries. Products reach the end customers via assembly companies positioned in the middle-tier between the producers and end customers. The assembly operations incur bill-of-materials (BOM) cost, which includes the cost of raw materials and components as well as the cost of producing, managing and synchronising supply, storage and distribution of these materials and components. We consider three coordination scenarios in the supply chain, and compare an uncoordinated supply chain with a horizontal and a vertical coordination scenario using the Nash equilibria of a multi-leader Stackelberg game between the producers and assembly companies. For exogenously given quality levels, we show that producers and assembly companies should either differentiate their product offering, or offer the high-end product only depending on the BOM cost. In addition, the uncoordinated scenario helps reduce the intensity of competition in the supply chain. For endogenous quality levels, partial product-differentiation equilibrium can emerge. Numerical experiments are performed to illustrate the impacts of BOM cost and quality levels on the equilibrium.