Upstream and Downstream Coordination in a Three-Tier Supply Chain

It is well-known that coordination within a supply chain reduces an inefficiency due to double marginalization in a decentralized chain. We study the effect of coordination in a three-tier supply chain consisting of a supplier, a manufacturer, and a retailer. A manufacturer invests in quality improvement. In this supply chain, coordination may occur between a supplier and a manufacturer (upstream coordination), or between a manufacturer and a retailer (downstream coordination). Using differential games approach, we characterize the equilibrium strategies and profits in three models, i.e., a decentralized supply chain, upstream coordination, and downstream coordination, for a finite planning horizon. We show that, although either type of coordination improves supply chain efficiency, upstream coordination and downstream coordination have different impacts on the equilibrium pricing and quality strategies and the consequent profits.