Service Investment and Channel Structure Decisions in Competing Supply Chains

This paper examines service-level and distribution channel decisions for two competing supply chains with a focus on how service competition affects the channel structure. Each manufacturer can use either an integrated channel (i.e., sells products directly) or a decentralized channel (i.e., sells products through retailers). Service can be provided by either producers (i.e., manufacturers) or sellers. We characterize the equilibrium under each service provision. We find that when manufacturers provide service, (i) symmetric decentralization is an equilibrium only when price elasticity, service cost, and service competition are low; (ii) the range in which symmetric decentralization is an equilibrium first increases and then decreases with the level of service competition; (iii) symmetric decentralization raises the service level when price elasticity is low; (iv) postponing the service-level decision reduces the range of symmetric decentralization; and (v) the impacts of key factors on channel structure equilibrium are robust to the observability of wholesale price. When service is provided by sellers, our results show that (i) symmetric decentralization is an equilibrium only when the retailer’s service cost is high and that of the manufacturer is low (otherwise, an asymmetric equilibrium may exist), and (ii) a higher service subsidy rate shrinks the symmetric decentralization range.