DIFFERENCES BETWEEN COURNOT AND BERTRAND COMPETITION AFFECTING CHOICE OF DISTRIBUTION CHANNEL FOR UNRELIABLE SUPPLIERS THROUGH INDUSTRY EQUILIBRIUM ANALYSIS

Abstract

Coupled with immense pressure to lower inventory levels, the growth in complexity of the supply chain networks have resulted in greater vulnerability to disruptions than ever. Learning more about these disruptions is critical for managing the risks. By modifying McGuire and Staelin’s (2008) model, the impact of taking into account supply chain’s reliability is being studied. Although incorporation of supply chain reliability results in lower profits under Bertrand competition, there is no impact on the equilibrium industry channel structure. Another focus of this thesis compares the differences between assuming Bertrand and Cournot competition at the retail level. Under Bertrand competition, pure decentralised industry channel structure can be a dominant Nash equilibrium when product differentiation is large. On the other hand, under Cournot competition, pure integrated industry channel structure is the only Nash equilibrium regardless of the degree of product differentiation. The differences between equilibrium results in Bertrand and Cournot competition can mainly be attributed to (1) the difference in magnitude of double marginalisation and price competition effects on Cournot and Bertrand firms and (2) the difference in relative sizes of these factors for different degree of product differentiation.