Competitive supply chain and revenue management : four essays

This dissertation includes four independent essays. Essay one (chapter two) considers a two-echelon, two-supply chain (SC) system in which manufacturers supply a generic product to their exclusive retailers, who then use service level and retail price to compete for heterogeneous consumers. We question: how do varied consumer preferences get reflected not only in differentiated products/services, but through them to the choice of SC structure that delivers them? We find that SCs can strategically manipulate the product/service strategy and SC structure to hedge themselves from horizontal competition. The key finding is that in a market where consumers have stronger diminishing marginal utility on service, then less differentiated products/services will be observed, and only decentralized supply chains can be the market equilibrium. This is in contrast to the well-known result in marketing that choosing vertical integration is always a Nash equilibrium, and that choosing decentralization can only be a Nash equilibrium when product substitutability is high. Essay two (chapter three) explores the classical revenue management problem in a competitive context, with both price and seat inventory competition. The main question is how should management make strategic marketing (pricing) and operational (seat allocation) decisions in such a competitive market? Do the conventional approaches (models and algorithms based on a monopoly market) give us the appropriate strategies? We find that in a market where price competition dominates, managers should set a lower price and safety protection level for full fare customers than in a monopoly or alliance market. In a market where seat inventory competition dominates, managers should set a higher price and safety protection level than a monopoly or alliance would. Interestingly, in a market where the two levels of competition are more evenly matched, managers should set a lower price and a higher safety protection level than a monopoly. We also explore the effect of the degree of competition and the market structure on the strategic decisions, and whether there is a first adopter advantage or second adopter disadvantage with revenue management. Essay three aims to extend the understanding of the Newsvendor model to a competitive framework. In a market with both price and inventory competition, newsvendors can gain customers with price and secure the sales with availability. We find that the newsvendors should adjust their inventory (safety stock or total inventory) and pricing strategies responsively to the nature of the competitive market. The profits of the newsvendors and their suppliers are also different under different competitive contexts. Both the Nash equilibrium strategy and the players' profits are influenced by the demand correlation and variability, but in different ways under different competitive scenarios. These observations provide some theoretical basis for the strategic selection made by newsvendors operating in certain competitive markets. Essay four (chapter five) explores the issue of competitors cooperating. It is a commonplace observation that even the most competitive firms often find it in their best interests to cooperate. An example of cooperation in operations management is when two supply chains agree in advance to transship or 'pool' surplus product for use by another. The alternative is to let their customers switch unsatisfied demand to a competitor. Which is preferable, and how does such a preference depend on the many parameters, prices, the nature of competition, the degree of competition, wholesale prices etc? To get answers, we study a stylized model under three market environments: a market with an exogenous retail price, an endogenous retail price, and with price competition. The summary answer is that strong price competition between substitutable goods should lead to caution in signing transshipment contracts. But with little price competition and particularly where retailers are free to set the transshipment price, then transshipment is probably the way to go. We also address the issue of an optimal transshipment price in each scenario, and compare the Nash equilibrium strategies between competing and transshipping.Business, Sauder School ofGraduat