Impact of power structure on probabilistic selling in supply chains

Abstract

Opaque products are gaining increasing popularity across a wide range of markets, where sellers and their suppliers may possess asymmetric market power. To study how the distribution of power between supply chain members impacts the dynamics of probabilistic selling, this paper uses a game-theory-based framework to capture two different power structures in supply chains: a manufacturer-led structure and a retailer-led structure. Our work uncovers several important findings. First, we reveal that power structure plays an important role in shaping the introduction of probabilistic selling. Probabilistic selling is more likely to arise in the manufacturer-led supply chain when product differentiation is relatively small, whereas it is more likely to emerge in the retailer-led supply chain when product differentiation is substantial. Second, we show that the impact of probabilistic selling on the profitability of supply chain members varies with power structure. The dominant member always benefits from the adoption of probabilistic selling, while the subordinate member may experience a loss in profit. Third, we find that inter-party transfers within supply chains can facilitate the adoption of probabilistic selling, creating a “win-win” outcome. The direction of the transfers varies with the power structure. Our work advances the understanding of probabilistic selling under different power structures in supply chains.

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