When do competing retailers benefit from sourcing through an intermediary?

Abstract

Supply chain intermediation is a prevalent business practice in global sourcing. We study a multi-tier supply chain comprising of two competing retailers, an intermediary, and a supplier. We analyze if sourcing through the intermediary is beneficial for both retailers compared to sourcing directly from the supplier. We establish a two-threshold policy on the retailers’ strategic choice of sourcing channel. Our analysis reveals that if the retailers’ cost associated with direct sourcing is low (below the lower threshold), both retailers tend to source directly from the supplier. Whereas, if the retailers’ direct sourcing cost is high (above the higher threshold), both retailers tend to follow an indirect sourcing strategy. However, when the direct sourcing cost is between these two thresholds, one retailer tends to source directly from the supplier, and the other retailer tends to source indirectly through the intermediary. Surprisingly, we find that under a moderately high range of direct sourcing cost, retailers may exhibit the prisoner’s dilemma and source through intermediaries even though they benefit from adopting the direct sourcing strategy. We also provide new insights on the impact of asymmetric direct sourcing cost and retailer’s brand preference and product differentiation on the equilibrium market outcomes.