The impact of supply chain structure on risk hedging: Procurement contract selection under monopoly, retailer competition, and manufacturer competition
Abstract
We explore how manufacturers choose procurement contracts as a means to mitigate the risks associated with price fluctuations and to maximize profits under different supply chain structures, taking into account factors such as interest rates and product substitution rate. We consider a two-stage supply chain in which contract selection is modelled as a Stackelberg game, with the manufacturer acting as the leader and the retailer as the follower. Our analysis covers three distinct supply chain structures: monopoly, retailer competition, and manufacturer competition. For each competitive setting, we consider two types of competition—Bertrand and Cournot. We examine the contract preferences of both manufacturer(s) and retailer(s), and whether the underlying reasons for these preferences differ. The results show that under a monopoly structure, medium spot market price volatility affects manufacturer and retailer’s contract choice in a similar way. Under retailer competition, spot market price volatility affects manufacturer and retailers’ preference similarly in Bertrand and Cournot competition. Under Cournot competition, spot market price volatility influences supply chain profits through the same mechanism as in a monopoly setting. In manufacturer competition, whether under Bertrand or Cournot competition, manufacturers adopt the same contract and achieve the same contract equilibrium. However, whether a retailer shifts its preferred contract depends on the level of market demand uncertainty. The study reveals that increased product substitution rate reduces profits across different market structures, while higher interest rates consistently diminish manufacturers’ profits.