Supply Chain Network Oligopolies with Product Differentiation

Abstract

This chapter is the first chapter of Part III of this book, which concentrates on quality in product differentiation and outsourcing settings. In Chap. 3, we noted that quality information asymmetry under product homogeneity could lead to a quality “free ride,” which might jeopardize certain firms’ profits and product quality. Therefore, in order to prevent such harmful results, it is important for firms to differentiate their products from that of their competitors, so that consumers will be able to identify the products of different firms and their quality. In this chapter, we present a supply chain network model with quality competition in differentiated products, where the product of each firm is substitutable but differentiated by a brand or label. We first present the equilibrium model and derive alternative variational inequality formulations. We then construct the projected dynamical systems model, which provides a continuous-time evolution of the firms’ product shipments and product quality levels. The stability analysis results are also presented, and a discrete-time version of the continuous-time adjustment process is constructed, which yields an algorithm with closed form expressions at each iteration. The algorithm is then utilized to compute solutions to several numerical examples. We also include sensitivity analysis results for minimum quality standards. The framework developed in this chapter can serve as the foundation for the modeling and analysis of competition among firms in industries ranging from food to pharmaceuticals to durable goods and high tech products, as well as Internet services, where quality and product differentiation are seminal.