Reservation Profit Levels and the
Division of Supply Chain Profit
Fernando Bernstein and L. Marx
Fuqua
We
address the problem of supply chain performance when the retailers have
bargaining power. In particular, in a supply chain with one supplier selling to
multiple competing retailers, we investigate the effect of retailer bargaining
power in the allocation of total supply chain profit among all channel members.
We model a retailer's bargaining power through its ability to set reservation
profit levels. In this environment, we show that supply chain performance is
not maximized, or it is only maximized conditional on the number of retailers
that offer the supplier's product, but that some retailers are excluded from trade.
In equilibrium, retailers' choices of reservation profit levels may induce the
supplier to trade only with a strict subset of the retailers, even when all
retailers must be included in order for channel profit to be maximized.