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Price and warranty competition in a supply chain with a common retailer

ABSTRACT Besides pricing strategy, warranty strategy becomes another important tool of competition for firms in manufacturing industries in recent years. In this context, this paper studies price and warranty competition problems in a supply chain with two manufacturers and one common retailer. The two manufacturers produce two substitutable products; one has high quality and the other has low quality. Mathematical models are developed to analyse these competition problems under four market structures: one centralized supply chain and three decentralized supply chains (i.e. Nash game, manufacturer-leading Stackelberg game and retailer-leading Stackelberg game). We find that the consumers’ sensitivity to warranty period plays an important role in the competition. As this sensitivity increases, the profits of the manufacturer with high-quality product and the retailer increase. However, as this sensitivity increases, whether the profit of the manufacturer with low-quality product increases or decreases depends on the magnitude of the product substitutability. The total profit of the supply chain increases in the consumers’ sensitivity to warranty period. Moreover, the manufacturer with high-quality product earns more than its rival when the sensitivity is low, and earns lower than its rival when the sensitivity is high.