Optimal contract selection considering the entry of a new supplier

¹ School of Management Engineering, Shandong Jianzhu University, Jinan 250101, P.R. China
² School of Economics and Management, Tsinghua University, Beijing 100084, P.R. China
³ School of Business Administration, South China University of Technology, Guangzhou 510640, P.R. China

^* Corresponding author: shangguanll@sem.tsinghua.edu.cn

Received: 11 May 2024
Accepted: 16 February 2025

Abstract

Cooperation between the upstream and downstream in the supply chain requires the signing of contracts, which include contract length, pricing, quantity, and so forth. This paper studies the contract selection strategies for an incumbent supplier, a potential supplier and a retailer. We develop a two-stage model to illustrate the situation in which the incumbent supplier collaborates with the retailer first, followed by the potential supplier. And we obtain Nash equilibrium solutions for six cases. Only the incumbent supplier and retailer are involved in the first period, the potential supplier enters in the second period and sells substitutable product. Three mathematical models, i.e., the long-term wholesale model, short-term wholesale model, and an agency model, are formulated to appraise the benefits. We find that the long-term wholesale contract reduces double marginalization, resulting in a lower wholesale price. The greater the substitutability between two kinds of products, the more likely the incumbent supplier is to prefer the long-term wholesale contract. Additionally, increased collaboration with additional suppliers may not always yield benefits for the retailer. The retailer exhibits more proactive behavior in the selection of the long-term wholesale contract with small capacity.