Supply Chain Contracting and Customer Substitution Behavior under Retail Competition

Project: Research

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Many manufacturers sell their products through various competing retailers in the same market. Due to legal issues or other constraints such as fairness, some manufacturers may provide different buyers with non-discriminating contracts. For example, the Robinson-Patman Act forbids companies from selling to different retailers at discriminating prices in the United States. Hong Kong has been working on a cross-sector Competition Bill that sanctions anti-competitive conduct. How a manufacturer contracts with competing retailers under non-discrimination constraints is an important problem. Note that by contracting with competing retailers, manufacturers should be aware of how competition among retailers affects consumer choice/substituion behavior, which in turn influences retailers' equilibrium solutions and thus the manufacturer's contracting decisions.We propose to consider the contracting problem under non-discrimination constraints and focus on the effects of customer substitution behavior on retailer competition and the manufacturer's resulting contracting strategy. We will first study how customer substitution among different retailers impacts retailers' equilibrium procurement decisions and discuss the implications that non-discrimination constraints may generate. We will then examine the manufacturer's decision about whether he should sell to competing retailers when he has no flexibility to differentiate them by offering different contracts. We will investigate the preference of a manufacturer for monopolistic or competitive retail markets and how this preference is influenced by customer substitution behavior, production cost and types of contracts (e.g., wholesale price, buyback price and sales rebate). We will further study the impact of direct sales (i.e., the manufacturer sells its product directly to customers) on the customers' purchasing behavior and competition with existing retailers if any. Finally, we will look at the social impact of such contracting problems and the role of public policy in regulating retail competition. The successful completion of the project will contribute to incorporating customer behavior into supply chain management. Particularly, it will improve our understanding of how customer choice/substitution behavior affects retail competition and thus the manufacturer's contracting strategy.


Project number9042012
Grant typeGRF
Effective start/end date1/01/1123/12/15