Service competition in a supply chain with two retailers under service level sensitive retail price and demand

In this paper, we consider a two-echelon supply chain in which a manufacturer supplies a common product to two retailers who are competing with each other in service level for the end customers. The market demand and the retail prices are assumed to be dependent on the retailers' service levels. The manufacturer may not satisfy both retailers' demand completely owing to yield uncertainty. The retailers then have the option to buy from the open market at a price higher than the wholesale price but lower than the individual retail price, in order to enhance their service levels. A game-theoretic approach is employed to find the equilibrium solution of the model. The proposed model is illustrated through a numerical example. It is observed that supply chain coordination can be achieved only for certain decision strategies.