Partial centralization in a durable‐good supply chain

Abstract

AbstractThere has been extensive research on the strategic choice between supply chain centralization and decentralization. However, most research assumes complete centralization or complete decentralization but omits the commonly adopted supply chain structure of partial centralization. With partial centralization, a firm owns a portion, but not all, of its partner. To help fill this research gap, in this paper, we make a major contribution by explicitly analyzing partial centralization in a supply chain where a durable‐good manufacturer owns a portion of its downstream retailer. We start with a two‐period model and derive analytical equilibrium outcomes of the supply chain and its members under complete centralization, complete decentralization, and partial centralization. First, our analysis reveals that partial centralization with an appropriate portion of ownership can yield the desirable product sales pattern over periods and alleviate the time‐inconsistency problem in selling durable goods. As a result, partial centralization can become the equilibrium structure for a durable‐good supply chain. Second, the manufacturer's optimal ownership level in the retailer decreases in the product durability and decision horizon length, implying that complete decentralization is more likely to be the supply chain structure in equilibrium for higher product durability and longer decision horizon. Third, our extended analyses demonstrate the robustness of the main results with backward partial centralization. Moreover, partial centralization outperforms conventional strategies such as two‐part tariffs that can coordinate a supply chain but not fully solve the time‐inconsistency problem associated with durable goods.