Transportation Research Part E 87 (2016) 113–129

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Transportation Research Part E

journal homepage: www.elsevier.com/locate/tre

Delivery leadtime and channel structure decisions for

make-to-order duopoly under different game scenarios
Tiaojun Xiao a,b, Tsan-Ming Choi c,⇑, T.C.E. Cheng d,b
a
Institute of Game Behavior and Operations Management, Nanjing University of Finance and Economics, Nanjing 210046, China
b
School of Management Science and Engineering, Nanjing University, Nanjing 210093, China
c
Business Division, Institute of Textiles and Clothing, Faculty of Applied Science and Textiles, The Hong Kong Polytechnic University, Hung Hom, Kowloon,
Hong Kong
d
Faculty of Business, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

a r t i c l e i n f o a b s t r a c t

Article history: We develop game-theoretic models to explore the quoted delivery leadtime, price, and
Received 24 June 2015 channel structure decisions for a make-to-order duopoly system under three game scenar-
Received in revised form 18 December 2015 ios. Under the integrated-manufacturer first scenario, we find that (i) decentralization of
Accepted 2 January 2016
the supply chain increases quoted leadtime; and (ii) both manufacturers may choose dif-
ferent channel structures under symmetric duopoly. By comparing with the symmetric
scenario and the retailer first scenario, we find that a manufacturer facing a decentralized
Keywords:
rival adopts decentralization when leadtime sensitivity, leadtime cost, and price elasticity
Channel structure
Leadtime
are very small; the effect of decentralization on quoted leadtime largely depends on game
Strategic decentralization scenario.
Game theory Ó 2016 Elsevier Ltd. All rights reserved.
Supply chain management
Make-to-order manufacturer

1. Introduction

The make-to-order (MTO) manufacturers, such as those offering mass customization services to consumers, offer prod-
ucts that meet the specific needs of individual consumers at a cost (Choi, 2013; Yeung et al., 2010). This model of operations
is popular in industries such as fashion apparel, home furniture, and office equipment industries. For example, fashion com-
panies such as Nike, and Adidas both offer mass customization programs in which consumers can order customized apparel
products from them. These companies compete by offering short leadtimes as well as appealing prices. Home furniture com-
panies that offer MTO furniture to consumers are competing by price as well as leadtime. For manufacturers of office equip-
ments and computers, such as Xerox and HP, they compete with each other by offering competitive prices and also delivering
products within short leadtimes. In all of the above examples, an MTO manufacturer quotes a delivery leadtime to satisfy
consumers’ demands, in which a longer leadtime yields a higher consumer disutility because the consumers need to wait
for a longer time. Although a shorter quoted leadtime can attract more consumers, the manufacturer must spend and invest
more in capacity to deal with demand uncertainty. There is obviously a trade-off between (short) lead time and (high) cost.
Regarding the manufacturer’s channel structure (CS) decision, we consider in this paper two mutually exclusive choices,
namely integration and decentralization. In the decentralized CS setting, the manufacturer sells its product through the
retailer from whom consumers order products, and the manufacturer and the retailer make decisions independently (based
on their self-interests and objectives). Here the manufacturer decides the quoted leadtime and announces it to consumers

⇑ Corresponding author. Tel.: +852 2766 6450.

E-mail addresses: xiaotj@nju.edu.cn (T. Xiao), jason.choi@polyu.edu.hk (T.-M. Choi), edwin.cheng@polyu.edu.hk (T.C.E. Cheng).

http://dx.doi.org/10.1016/j.tre.2016.01.003
1366-5545/Ó 2016 Elsevier Ltd. All rights reserved.
114 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129

through the retailer. For example, in the furniture industry, Snimay (a manufacturer) sells products through Red Star Macall-
ine (a retailer) in China. After obtaining the price and quoted leadtime information, a consumer can order a product from Red
Star Macaline which sends the specific order to Snimay, and then Snimay produces and delivers it to the consumer. On the
other hand, in the integrated CS setting, the manufacturer (e.g., a company like Shanzhong Classical Furniture, Aris, etc.)
receives the orders from consumers directly and makes all the decisions with a view to maximizing the supply chain’s chan-
nel profit. It is a rather common belief that in the single supply chain setting, an integrated manufacturer should perform
better than a decentralized one because the decentralized supply chain suffers the double marginalization effect. This is
why the mainstream literature on supply chain coordination focuses on developing proper incentive alignment schemes
so that individual agents in the decentralized case will behave in the same way as the integrated case (Jeuland and
Shugan, 1983; Ingene and Parry, 1995). However, this belief has been challenged by several findings that in the competitive
environment, the manufacturer’s resulting profit under the integrated setting may be worse than that under the decentral-
ized setting (Balasubramanian and Bhardwaj, 2004; McGuire and Staelin, 1983). In fact, the competition among supply
chains decreases the wholesale prices and retail prices, which has a negative effect on the channel profits. Decentralization
of the supply chain raises the retail prices through the double marginalization effect, which offsets a part of the negative
effect of channel competition. However, the manufacturer using the decentralization strategy only achieves a part of the
channel profit. Thus, it is important for manufacturers to choose good CS strategies in the competitive environment (i.e.,
the entrant competes for consumers with the incumbent firm). In general, for obtaining analytically tractable results, the
CS models consider a duopolistic competition rather than a perfect/oligopoly competition because duopolistic competition
has reflected the effect of competition on price (McGuire and Staelin, 1983). In this paper, we also consider a duopolistic
competition; specifically, we explore the case where two supply chains compete on price and delivery leadtime.
Intuitively, the manufacturer’s CS strategy affects the retail price and quoted delivery leadtime decisions, which further
influences market demand and the manufacturer’s profit. It is well known that decentralization of the supply chain increases
the retail price due to the double marginalization effect. However, it is unclear how decentralization of the supply chain
affects the quoted leadtime and how the quoted leadtime decision affects the CS strategy, especially in the competitive envi-
ronment (i.e., there exist competing incumbent firms). As a result, we examine the CS decision of an MTO manufacturer
under duopoly, and explore the effects of CS on the price and leadtime decisions.
Motivated by both industrial features of MTO operations and recent findings in the literature, we develop in this paper
duopoly gaming models to examine the delivery leadtime and CS strategies of two MTO manufacturers that compete on
the price and delivery leadtime. Our main objective is to explore how the quoted leadtime depends on the CS strategy,
and explain when and why ‘‘decentralized CS” is optimal for a manufacturer (and hence exists in practice). Following the
probable cases on pricing sequence, we divide the discussions into three pricing game scenarios: the symmetric pricing
power (simultaneously act) scenario, the integrated-manufacturer first scenario, and the retailer first scenario. In some cases,
the headquarters of the integrated manufacturer first announces a retail price via the direct store in advance, where the
direct store cannot change the retail price, and then the rival retailer announces the retail price, i.e., the integrated-
manufacturer first scenario emerges. Sometimes, when the consumer’s order arrives, the direct store of the integrated man-
ufacturer communicates with the headquarters to decide the retail price, which delays the retail pricing decision, and the
rival retailer first announces the retail price to take the first-mover advantage, i.e., the retailer first scenario emerges. We
investigate the interactions among the optimal decisions on retail price, quoted leadtime, and CS, and illustrate how the
CS strategy depends on the key factors such as price elasticity, leadtime sensitivity, and leadtime cost. We find that two man-
ufacturers will choose decentralization when these key factors are very small for each game scenario. Unlike the extant lit-
erature, we find that two manufacturers may choose different CS strategies even when the respective two supply chains are
fully symmetric; and decentralization of the supply chain increases the quoted leadtime. Comparing with the extant liter-
ature on CS, some new managerial insights are generated because we incorporate the leadtime competition into the model
and explore the effect of the pricing game scenario on the CS decision. For example, we find that the pricing game scenario
may reverse the effect of decentralization of the supply chain on the quoted leadtime; and whether two manufacturers
choose different strategies or not depends on the pricing game scenario.

2. Literature review1

This paper is related to channel structure decisions in the competitive supply chains, pricing game scenario, channel coor-
dination, and the price and leadtime competition.
As we pointed out earlier, decentralization and integration are two important decisions for an MTO manufacturer in the
competitive environment. There are two streams of research on decentralization and integration. It is well known that in the
monopoly setting, from the supply chain’s perspective, the manufacturer has no incentive to adopt decentralization in its
distribution channel due to the double marginalization effect. However, under duopoly, the situation is different. For exam-
ple, McGuire and Staelin (1983) show that, when the two players at the same level are symmetric, the channel structures
equilibrium are symmetric, and symmetric decentralization (both firms choose decentralization) is an equilibrium when
product substitutability is sufficiently high. Bonanno and Vickers (1988) find that vertical separation is profitable under

1
We sincerely thank an anonymous reviewer whose advice has substantially enhanced the coverage of this literature review section.
 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129 115

the duopoly price competition. Gupta and Loulou (1998) extend McGuire and Staelin (1983) to the case where the manufac-
turers carry out process innovation and reveal consistent findings. Further, Gupta (2008) investigates how spillover of
knowledge created by manufacturers’ investments in process innovation affects CS equilibrium. Boyaci and Gallego
(2004) consider a duopoly game between two separate two-stage supply chains competing on consumer services. Desai
et al. (2004) show that adopting strategic decentralization by adding an independent retailer and using a two-part tariff con-
tract, the durable goods manufacturer could make a higher profit than it could if it sells directly to consumers (i.e., integra-
tion). Xiao and Choi (2009) study the effect of risk aversion on the equilibrium CS decision under the quantity competition
scenario. Although many interesting findings are obtained by the above reviewed literature on decentralization and integra-
tion, important issues such as the effect of pricing game scenario on CS decision are still under-explored.
Bargaining power in supply chain systems affects the decisions as well as channel profitability (Sheu, 2011; Sheu and Gao,
2014). In particular, the effect brought by the time sequence of games (pricing game scenario) on equilibrium outcome is an
interesting issue. In the literature, Choi (1991) considers a system with two manufacturers and one retailer, and develops
two (manufacturer and retailer) Stackelberg games and one Nash game to study the pricing game scenario’s effect on the
retail price and profits. Based on Choi (1991), Kadiyali et al. (2000) study the channel power by an empirical investigation
of pricing. Choi (1991) is further extended by Choi (1996) and Lee and Staelin (1997), in which Choi (1996) studies the case
with the duopoly common retailer channel and finds that product (store) differentiation benefits the manufacturers (retail-
ers) but harms the retailers (manufacturers); Lee and Staelin (1997) investigate the role of vertical strategic interaction in
driving the optimal channel pricing strategy under three game scenarios. How the pricing game scenario affects the quoted
leadtime and CS decisions is still an open question. Thus, in this paper, we address these issues, especially the CS decisions,
under different pricing game scenarios. We find that the pricing game scenario can change the equilibrium decisions.
A few recent studies in the literature explore the influence of leadtime on supply chains. For example, Hsu and Lee (2009)
study the replenishment and lead time reduction decisions for an integrated inventory system. Jian et al. (2015) develop a
newsvendor model to study how to reduce demand forecasting risk with a controllable leadtime. Note that, for an MTO man-
ufacturer, in addition to offering an attractive retail price, the quoted delivery leadtime is an important marketing strategy
for attracting consumers. No matter whether CS is decentralized or integrated, there are a few major operational decisions
that are crucial for the manufacturers in competition (such as price and quoted leadtime). For price, it is well known that it
affects market demand and there are many challenging issues behind pricing games. For example, Chiu et al. (2009) conduct
an analytical study on the price war with a stochastic linear price dependent demand. In addition to price, quoted leadtime
also affects the production and inventory decisions (Hennet, 2003; Hsu and Lee, 2009) and quoted leadtime has become an
important dimension of competition in both retailing and industrial trading (Cachon and Harker, 2002; Pangburn and
Stavrulaki, 2008). Price and leadtime competition usually co-exist and in order to obtain closed-form analytical solutions,
many studies assume that market demand is a linear or log-linear function of price and leadtime (see, e.g., Palaka et al.,
1998; So and Song, 1998). Some studies consider an inelastic market in which the overall market size is fixed and compe-
tition in price and leadtime would result in a reallocation of this piece of ‘‘market cake” (So, 2000). For the time-based com-
petition, Li and Lee (1994) develop a duopoly competition model in which the consumer preference is influenced by price,
quality, and leadtime, and show that the company with a higher processing rate/capacity tends to enjoy a larger market
share when its opponent has a sufficiently high processing rate/capacity to serve all the consumers. Thomas and Tyworth
(2006) review the literature related to pooling leadtime risk. Xia and Rajagopalan (2009) identify the strategic roles of pro-
duct variety and leadtime in the duopoly competition. Hong et al. (2012) study the pricing and leadtime decisions in a duo-
poly market consisting of two leading firms and a group of smaller firms. Xiao et al. (2014) study the price and leadtime
competition between one decentralized supply chain and one integrated supply chain. Zhu (2015) investigates the impact
of integration of capacity, pricing, and lead time decisions on the marketing strategy and firms’ profits, where the retailer
decides the selling price and the promised delivery time. In the MTO supply chain, the manufacturer bears a capacity cost
of serving consumers. Typically, the capacity cost depends on the delivery leadtime (besides the quantity) because the
quoted leadtime affects the extra capacity used to deal with uncertainty. Undoubtedly, price and quoted leadtime are
two well-studied decisions in operations management. However, how the interactions between them affect the choice of
CS strategies is under-explored.
To coordinate a supply chain, various contracts have been developed since Jeuland and Shugan (1983). For instance,
Ingene and Parry (1995) study how to coordinate a supply chain consisting of one manufacturer and multiple independent
retailers. Pekgün et al. (2008) study how to coordinate the production department and marketing department of a firm when
consumers are sensitive to price and quoted leadtime. Boyaci and Gallego (2004) study whether coordination is an equilib-
rium strategy. Xiao et al. (2014) investigate how to coordinate a supply chain when it competes with an outside integrated
chain on price and leadtime. Hu et al. (2011) develop a mechanism for the manufacturing and the sales departments of a
manufacturer to coordinate the leadtime hedging behavior. Li et al. (2012) investigate how to coordinate the supply chain
with a controllable leadtime and how to induce the true cost information. Xiao and Qi (2012) study an MTO supply chain and
show that it can be coordinated via an all-unit quantity discount contract. Heydari (2014a) designs a coordination mecha-
nism to reduce the harmful effect of upstream leadtime under the upstream and downstream stochastic leadtimes. Heydari
(2014b) studies how to coordinate the supply chain through reducing lead time fluctuations. In this paper, we do not inves-
tigate the supply contracting mechanism which can coordinate supply chains while we do study whether integration
(coordination) is an CS decision.
116 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129

Based on the studies reviewed above, we consider in this paper the effects of price and leadtime competition on the CS
decisions for two manufacturers. Note that this paper is different from most of the reviewed literature in terms of the ana-
lytical model because we consider the quoted leadtime decision with a capacity cost (Pekgün et al., 2008; Xiao et al., 2014),
which is different from the quadratic service/quality investment model (Balasubramanian and Bhardwaj, 2004) and examine
the effect of the pricing game scenario on the equilibrium decisions (especially, the CS decision). We find that the pricing
game scenario plays an important role in making the CS and leadtime decisions. Unlike Boyaci and Gallego (2004), we find
a very different result that a manufacturer will adopt decentralization against integration if the price elasticity is very low
under the integrated-manufacturer first scenario. This paper is different from the existing literature on CS (e.g., McGuire and
Staelin, 1983) because we (i) study the interactions between the CS decision and the price and quoted leadtime decisions;
and (ii) investigate the effects of the pricing game scenario on the CS and leadtime decisions for manufacturers.

3. The basic model

Consider two MTO competing manufacturers that produce substitutable products, where they can customize some non-
key components according to the detailed order specifications of consumers. We consider the case where the manufacturers
mainly compete on price and quoted (delivery) leadtime. Under the MTO production mode, quoted leadtime is an important
decision variable (Xia and Rajagopalan, 2009; Xiao et al., 2014). Each manufacturer offers a quoted leadtime under which
demands are satisfied with a predetermined service reliability (say, 98%, 99%). To ensure that the service reliability con-
straint is satisfied within the guaranteed leadtime, a higher demand needs a higher manufacturer’s capacity. Here, the
quoted leadtime is a decision variable and it differs from the real leadtime because the real leadtime is a random variable
depending on, e.g., demand.
We denote the two competing manufacturers as manufacturers 1 and 2, respectively, i.e., i ¼ 1; 2. The corresponding
retailer/product is denoted by retailer/product i. As we pointed out earlier, the CS strategies of the competing manufacturers
influence their performance to a large extent. We focus on examining how the manufacturers determine their CS strategies
to maximize their respective profits under the leadtime and price competition. Each manufacturer can adopt one of the two
CS strategies, namely integration (IÞ and decentralization (DÞ. When a manufacturer uses strategy D, the manufacturer sells
its product through an exclusive retailer, where the manufacturer and the retailer make their decisions independently
(McGuire and Staelin, 1983; Gupta and Loulou, 1998); while when the manufacturer uses strategy I, the manufacturer sells
the product to consumers directly. We refer to the case where manufacturer 1 uses strategy I and manufacturer 2 uses strat-
egy D as ID. Similarly, we have the other three notions, DD and II, DI. We denote each strategy profile by a superscript. The
supply chain’s structure under DD is described by Fig. 1. Similarly, we can depict the figures under other structures. To focus
on the core strategic factors under investigation, we consider the case where the two manufacturers have the same produc-
tion cost, i.e., they are symmetric ‘‘in position” such that exchanging their positions does not affect the results.
For convenience, we use the following notation (i ¼ 1; 2Þ throughout the paper:

c the marginal production cost of manufacturer, c > 0;

Li the quoted delivery leadtime of manufacturer i; Li > 0;
a the sensitivity of consumer to leadtime, termed as the leadtime sensitivity, a P 0;
wi the unit wholesale price announced by manufacturer i using strategy D; wi P c;
mi the profit margin of the decentralized manufacturer i; mi ¼ wi  c;
pi the retail price for product i; pi P wi ;
b the leadtime cost factor, reflecting the service reliability, i.e., it increases with both the service reliability and the unit
capacity cost, b > 0.

In the MTO production mode, there exists a delivery leadtime. Besides price, consumers are often sensitive to leadtime/
waiting time (Xia and Rajagopalan, 2009). Irmen (1997) points out that the price elasticity of demand is a key factor for mak-
ing the optimal channel structure decision. For the make-to-order duopoly, the quoted delivery leadtime is an important
edge for consumers. Thus, we incorporate them into our demand model. Specifically, we extend Irmen (1997) to the case
with delivery leadtime, i.e., the demand for product i is given by the following

1

xi ¼  dpi þ ðpj  pi Þ  aðLi  Lj Þ; i; j ¼ 1; 2; j – i; d P 0; ð1Þ
2
where d is the price elasticity of demand. When d ¼ 0, demand model (1) becomes the horizontal differentiation model with
the consumer’s utility v  pi  aLi  xi =2 in the fully covered market, where v is the consumer’s valuation of consuming one
unit of the product. Eq. (1) means that the market demand for manufacturer i depends on the retail price difference and lead-
time difference. A lower retail price or shorter leadtime can increase a manufacturer’s competitive advantage. From Eq. (1),
we see that
x1 þ

x2 ¼ 1  dðp1 þ p2 Þ, which is a decreasing function of the retail prices, i.e., it is price elastic. We assume
cd < 1=2 to ensure a positive market demand when the two chains provide the same quoted leadtime and offer the retail
prices equal to the marginal production cost. We will further extend demand (1) to the case where the total demand is ‘‘lead-
time elastic” in the alternative model.
 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129 117

Manufacturer 1 Manufacturer 2

w1 , L1 w2 , L2

Retailer 1 Retailer 2

Product 1 Product 2
p1 p2
L1 L2
Consumers

Fig. 1. Supply chains structure under DD.

Besides the marginal production cost c, to quote the leadtime Li , manufacturer i has to incur a leadtime-dependent cost
b=Li (i.e., an extra capacity cost), which decreases with the quoted leadtime because it is easier for the manufacturer to sat-
isfy the consumer’s demand within a longer delivery time. The leadtime-dependent cost is used to deal with uncertainty
coming from randomness of consumer arrival and production time. Notice that this cost structure is commonly adopted
in the MTO service system studies (see, e.g., Allon and Federgruen, 2007; Benjaafar et al., 2007; Xia and Rajagopalan,
2009; Xiao et al., 2014). Furthermore, when manufacturer i uses strategy D, the profit of retailer i is

piR ðL1 ; L2 ; p1 ; p2 ; wi Þ ¼ ðpi  wi Þ
xi ð2Þ

and the manufacturer’s profit is

piM ðL1 ; L2 ; p1 ; p2 ; wi Þ ¼ ðwi  cÞ
xi  b=Li : ð3Þ

When manufacturer i uses strategy I, the manufacturer directly sells products to consumers. Thus, the manufacturer’s profit
becomes

piM ðL1 ; L2 ; p1 ; p2 Þ ¼ ðpi  cÞ
xi  b=Li : ð4Þ

We consider three game scenarios following the pricing game’s time sequence: the integrated-manufacturer first (MF)
scenario, the retailer first (RF) scenario, and the symmetric pricing power (SP) scenario. Specifically:
Under the MF scenario, given the channel structure profile, the game’s time sequence is as follows:

(i) The integrated manufacturer jointly decides the quoted leadtime and the retail price, and the decentralized manufac-
turer jointly determines the unit wholesale price and the quoted leadtime.
(ii) The retailer working with the decentralized manufacturer determines its retail price.

Under the SP scenario, the two supply chains decide the retail prices for each CS strategy, simultaneously, i.e., the inte-
grated manufacturer decides the retail price in Stage (ii) and all the other sequences under the MF scenario are unchanged.

Under the RF scenario, given the channel structure profile, the time sequence of this game is stated in the following:

(i) The integrated manufacturer determines the quoted leadtime, and the decentralized manufacturer jointly determines
the unit wholesale price and the quoted leadtime.
(ii) The retailer working with the decentralized manufacturer determines its retail price.
(iii) The integrated manufacturer determines the retail price.

To better understand the game’s time sequence, we depict Fig. 2.

Using backward induction, we can obtain the sub-game perfect Nash equilibrium (SPNE).

4. Equilibrium analysis under the MF scenario

We can show that all players prefer to use the MF scenario when the two supply chains compete only on price (a ¼ b ¼ 0Þ
and the price elasticity is very low. Thus, we first focus on the MF scenario in this section, and then study the other scenarios
in the alternative models.
118 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129

I Li , pi
Manufacturer
i ’s CS strategy
D wi , Li retailer i offers p i Time

(a) The MF scenario.

I Li manufacturer i offers pi
Manufacturer
i ’s CS strategy
D wi , Li retailer i offers p i Time

(b) The SP scenario.

I Li manufacturer i offers pi
Manufacturer
i ’s CS strategy
D wi , Li retailer i offers p i Time

(c) The RF scenario.

Fig. 2. The game’s time sequence.

4.1. Equilibrium decisions

4.1.1. Equilibrium decisions in the symmetric integrated setting (II)

We first consider the symmetric integrated setting in which the two manufacturers sell products directly to consumers. In
this case, both manufacturers face the following optimization problem:


1
max pIIiM ðL1 ; L2 ; p1 ; p2 Þ ¼ ðpi  cÞ  dpi þ ðpj  pi Þ  aðLi  Lj Þ  b=Li ; i ¼ 1; 2: ð5Þ
Li ;pi 2

Solving Eq. (5) yields Proposition 1.

Proposition 1. Assume b < b ^1 ¼ ð1 þ dÞ ð1  2cdÞ =½8að1 þ 2dÞ . In the symmetric integrated (II) setting, the Nash equilibrium
2 3 3
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
decisions are pi ¼ 2þ4d and LIIi ¼ að1þ2dÞb
II 1þ2cð1þdÞ
ð1=2cdÞ
. Under the Nash equilibrium, the demands are xII1 ¼ xII2 ¼ ð1 þ dÞð1  2cdÞ=ð2 þ 4dÞ
p ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ffi
2
ð1=2cdÞab
and profits are pIIiM ¼ ð1þdÞð12cdÞ
2  pffiffiffiffiffiffiffiffi
1þ2d
ffi > 0:
4ð1þ2dÞ
Proofs of all propositions are presented in Appendix A.
Observe that the assumption b < b ^1 , the manufacturers make
^1 guarantees a positive profit for each manufacturer. If b > b
a negative profit owing to the high leadtime-dependent cost such that the manufacturers will withdraw from the market,
^1 ensures the existence and uniqueness of the Nash
which is beyond the scope of this paper. In addition, the assumption b < b
equilibrium which is critical for yielding analytically tractable insights. Thus, in analyzing the MF scenario, we assume that
^1 is always satisfied.
the condition b < b
Note that the results in Proposition 1 differ from those in Balasubramanian and Bhardwaj (2004) for the integrated setting
as follows: a higher leadtime cost factor b reduces the equilibrium profit (intuitive), while a higher quality cost factor in their
model increases the equilibrium profit due to a lower quality level. They consider the quadratic cost of quality, which differs
from ours. In their model, the direct effect of quality cost factor on quality cost is lower than its indirect effect on quality cost
through quality level such that a higher quality cost factor decreases the quality cost. However, in our model, the direct effect
of leadtime cost factor on the leadtime-dependent cost is higher than its indirect effect on the leadtime-dependent cost
through the quoted leadtime.

4.1.2. Equilibrium decisions in the symmetric decentralized setting (DD)

In this setting, both manufacturers choose strategy D. The retailer working with manufacturer i determines the retail
price pi to maximize Eq. (2). For convenience, we denote the profit margin of manufacturer i; ðwi  cÞ, as mi , i.e.,
mi ¼ wi  c. By solving the first-order conditions @ piR =@pi ¼ 0, we obtain

3 þ 2cð3 þ 5d þ 2d Þ þ 2ð1 þ dÞð2mi þ 2dmi þ mj Þ  2að1 þ 2dÞðLi  Lj Þ þ 2d

2

i ðL1 ; L2 ;m1 ; m2 Þ ¼
pDD 2
; i;j ¼ 1; 2; j – i; ð6Þ
6 þ 16d þ 8d
 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129 119

which means that the retail price depends on the quoted leadtime difference and the sensitivity of leadtime. The wholesale
price (profit margin) of a manufacturer not only increases the retail price of its retailer, but also the rival’s retail price, i.e.,
alleviating the retail price competition.
Proposition 2 summarizes the equilibrium outcome in the symmetric decentralized setting.
3 2 3 2
^2 ¼ ð1þdÞð12cdÞ ð3þ14dþ14d þ4d
Proposition 2. Assume b < b 3
Þ
. In the symmetric decentralized (DD) setting, we have the SPNE
8að1þ2dÞ2 ð1þ7dþ4d2 Þ
decisions: rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2 2
wDD
i ¼ c þ ð3þ2dÞð12cdÞ DD
2 , pi ¼ c þ ð12cdÞð2þ6dþ3d
2
Þ DD
3 , and Li ¼ 2bð1þ7dþ4d Þ
að1þdÞð12cdÞ. Under the SPNE, the market demand for channel i is
2þ14dþ8d 1þ9dþ18d þ8d
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2
þ2d3 Þ 2
ð3þ17dþ28d2 þ18d3 þ4d4 Þ ð1þdÞð12cdÞab
xDD
i ¼ ð12cdÞð1þ5dþ6d 2 , the manufacturer i’s profit is pDD
iM ¼
ð12cdÞ
2  2 > 0; and the retailer i’s
2ð1þ2dÞð1þ7dþ4d Þ 4ð1þ2dÞð1þ7dþ4d2 Þ 2þ14dþ8d

2 2 2
profit is pDD
iR ¼
ð1þdÞð12cdÞ ð1þ4dþ2d Þ
2 2 2
> 0.
4ð1þ2dÞ ð1þ7dþ4d Þ

2
ð12cdÞð1þ4dþ2d Þ
From Proposition 2, we know that, under DD, the retailer’s unit profit pDD
i  wDD
i ¼ 2ð1þ2dÞð1þ7dþ4d 2 , which is a decreasing
Þ
function of c and d. Intuitively, when the price elasticity increases, the retail price has a larger negative effect on market
demand. Thus, the retailer charges a lower profit margin to stimulate market demand. Since the retailer is guaranteed to
obtain a positive profit (i.e., pDD
iR > 0Þ, the retailer has an incentive to accept the manufacturer’s wholesale price contract.
2

From Propositions 1 and 2, we derive the following.

 
Corollary 1. Symmetric decentralization increases the quoted leadtime LDD
i P LIIi .
Corollary 1 implies that under the symmetric settings, the decentralized manufacturers have longer quoted leadtimes
than the integrated manufacturers. Moreover, a higher price elasticity intensifies the effect of symmetric decentralization on
the quoted leadtime. When the price elasticity is zero (d ¼ 0Þ, symmetric decentralization does not affect the quoted leadtime.

4.1.3. Equilibrium decisions in the asymmetric CS setting (ID)

Owing to symmetry of the two manufacturers’ positions, we only consider the case where manufacturer 1 chooses strat-
egy I and manufacturer 2 chooses strategy D, i.e., ID. By exchanging the positions of the players in the two supply chains, we
can obtain the equilibrium outcome under DI. Under ID, the retailer working with manufacturer 2 determines the retail price
to maximize Eq. (2). Solving the first-order condition @ p2R =@p2 ¼ 0 for p2 , we have

2 ðL1 ; p1 ; L2 ; m2 Þ ¼ ðc þ m2 Þ=2 þ ð1 þ 2p1 þ 2aL1  2aL2 Þ=ð4 þ 4dÞ:

pID ð7Þ

Eq. (7) implies that, when manufacturer 1 offers a higher retail price or manufacturer 2 offers a higher wholesale price (mar-
gin), the retailer working with manufacturer 2 raises the retail price. Substituting Eq. (7) into Eqs. (2)–(4), we obtain the
manufacturer 1’s profit as follows

pID
1M ¼ ðp1  cÞ½1=2  ð1 þ dÞp1 þ p2 ðL1 ; p1 ; L2 ; m2 Þ  aL1 þ aL2   b=L1 ;
ID
ð8Þ

the manufacturer 2’s profit is given by

pID
2M ¼ m2 ½1  2ðc þ m2 Þð1 þ dÞ þ 2p1  2aðL2  L1 Þ=4  b=L2 ; ð9Þ

and the retailer 2’s profit is shown below

pID
2R ¼ ½1  2ðc þ m2 Þð1 þ dÞ þ 2ðp1 þ aL1  aL2 Þ =½16ð1 þ dÞ P 0:
2

Since retailer 2 can obtain a non-negative profit, the retailer would be willing to sell the manufacturer 2’s product.
From Eqs. (8) and (9), we derive Proposition 3.
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
Proposition 3. Under the asymmetric CS profile ðIDÞ, we have LID
1 ðp1 Þ ¼ 2bð1 þ dÞ=½að1 þ 2dÞðp1  cÞ and
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ID ID
LID
2 ðm2 Þ ¼ 2b=ðam2 Þ; ðp1 ; m2 Þ is the solution of the first-order conditions 1  2cð1 þ dÞ  4m2 ð1 þ dÞ þ 2p1 þ
2aðLID 3 þ 2d þ 2cð2 þ dÞð1 þ 2dÞ þ 2m2 ð1 þ dÞ  4ð1 þ 4d þ 2d Þp1  2að1 þ 2dÞ
ID 2
1 ðp1 Þ  L2 ðm2 ÞÞ ¼ 0 and

  qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
1 ðp1 Þ < 2 bð1 þ 5d þ 6d þ 2d Þ=ða þ 2daÞ ; and
2 3 2
LID ID
ðp1 ; m2 Þjp1 > c; m2 > 0; LID
3
1 ðp1 Þ  L2 ðm2 Þ ¼ 0 in the set
p ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
L2 ðm2 Þ < 2 bð1 þ dÞ=a g:
ID 3 2

Combining the results of Propositions 1–3, we know that whether the leadtime sensitivity/leadtime cost influences the retail
price depends on the CS strategies. To be specific, when both manufacturers are using the same strategy, these factors do not
affect the retail price because the quoted leadtime difference does not exist; otherwise, they affect it.

2
We sincerely thank an anonymous reviewer whose insightful comments motivate us to add this important result.
120 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129

4.2. CS equilibrium analysis

In this subsection we investigate (i) how the manufacturer strategically determines price and quoted leadtime and (ii)
how a channel structure can be designed to maximize the manufacturer’s resulting profit. Owing to symmetry in positions
of the two manufacturers, we only consider the SPNE decisions and the profit of manufacturer 1 in the following analysis.
From Section 4.1, we know that the equilibrium expressions in the ID and DI settings are complex. To further illustrate
the findings on the respective equilibrium decisions, we have to employ numerical examples. In this subsection, we employ
the following default values for the parameters: c ¼ 0:2; b ¼ 0:1; d ¼ 0:028, and a ¼ 0:05, which satisfy all the model
assumptions. As a remark, the manufacturers’ profits are all positive with this set of parameters.

4.2.1. Equilibrium decision variables

Figs. 3–6 illustrate the effects of price elasticity d and leadtime sensitivity a on the equilibrium retail price and leadtime
under given channel structures. In Fig. 5, as the retail prices under symmetric integration/decentralization are independent
of the leadtime sensitivity (pII1 ¼ 0:668182 and pDD 1 ¼ 1:89475Þ, we do not depict them. Since the effect of the leadtime cost
factor b on the retail price is similar to that of the leadtime sensitivity and its effect on the quoted leadtime is contrary to that
of the leadtime sensitivity, we omit them.
From Propositions 1 and 2, we know that the equilibrium retail price in the symmetric decentralization setting is higher
than that in the symmetric integration setting because the equilibrium wholesale price for the decentralized manufacturer
relaxes the price competition (also see Fig. 3). Note that this finding differs from Balasubramanian and Bhardwaj (2004), who
find that the retail prices are identical in the symmetric settings in a Nash bargaining framework. Fig. 3 implies that the retail
price decreases with the price elasticity. Intuitively, a higher price elasticity increases the direct negative effect of own retail
price on demand such that the retail price is decreased to attract consumers. Fig. 5 shows that under the asymmetric CS
strategy setting, when the leadtime sensitivity becomes higher, the integrated manufacturer increases the retail price while
the decentralized manufacturer decreases the retail price, i.e., the CS strategy reverses the effect of the leadtime sensitivity
on the retail price. However, Figs. 3 and 5 imply that the effect of leadtime sensitivity on the retail price is smaller than the
price elasticity’s effect.
Note that the two supply chains are symmetric in position (so, LII1 ¼ LII2 ; LDD DD ID DI DI ID
1 ¼ L2 ; L1 ¼ L2 , and L1 ¼ L2 Þ. From Figs. 4
and 6, we see that decentralization of the supply chain increases its quoted leadtime because the manufacturer only reaps a part

p1

2.0

DD
1.5

DI
1.0 ID

II
d
0.05 0.10 0.15 0.20

Fig. 3. The retail price vs. price elasticity.

L1

3.0

2.8 DI

2.6
DD
2.4
II
2.2
ID
d
0.05 0.10 0.15 0.20

Fig. 4. The quoted leadtime vs. price elasticity.

 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129 121

p1
1.30 DI

0.04 0.06 0.08 0.10 0.12

1.28

1.26

1.24

ID
1.22

Fig. 5. The retail price under asymmetric strategies vs. leadtime sensitivity.

L1

3.5

3.0 DI

2.5 DD
II
2.0 ID

1.5

1.0

0.5

0.04 0.06 0.08 0.10 0.12

Fig. 6. The quoted leadtime vs. leadtime sensitivity.

of the benefit of reducing leadtime, i.e., the decentralized manufacturer has a longer quoted leadtime than the integrated one in
both the symmetric and asymmetric settings, which is contrary to Liu et al. (2007) who find that decentralization reduces
the quoted leadtime in the single supply chain setting. Liu et al. (2007) do not consider the competition between the two
supply chains. The competition effect between the two supply chains in our model directly accounts for this difference
because competition affects the pricing and leadtime decisions. Moreover, Fig. 4 implies that a higher price elasticity
expands the effect of decentralization on the quoted leadtime.

4.2.2. Equilibrium CS strategy

Figs. 7 and 8 show the effects of d and a on the manufacturer’s profit for a given CS strategy. Note that the two manu-
facturers’ positions are symmetric, i.e., exchanging positions of players in the two supply chains does not affect the results.
Specifically, we have pII2M ¼ pII1M ; pID
2M ¼ p1M ; p2M ¼ p1M , and p2M ¼ p1M . Thus, we only need to consider manufacturer 1.
DI DI ID DD DD

Since the effect of b on the manufacturer’s profit is similar to that of a, we omit it for brevity.
From Fig. 7, we derive the following result.

Result 1. Under the MF scenario, when the price elasticity is sufficiently small, decentralization is a dominant strategy for each
manufacturer; when the price elasticity is sufficiently large, integration is a dominant strategy for each manufacturer; otherwise, a
manufacturer chooses a different strategy from the rival.
Result 1 implies that under the MF scenario, if a manufacturer wants to enter a market where the incumbent competitor is an
integrated manufacturer, the entrant may want to choose a decentralized channel structure when the price elasticity is sufficiently
small. Intuitively, decentralization of the supply chain increases the retail price, which increases the manufacturer’s unit
profit. A smaller price elasticity decreases the negative effect of the retail price on market demand, which further decreases
the negative effect of decentralization on the manufacturer’s profit. As a result, the manufacturer against strategy I should
choose strategy D to relax the price competition when the price elasticity is small. This result differs from the single supply chain
setting in which coordination (integration) of the supply chain is beneficial to the whole channel (Liu et al., 2007; Pekgün
et al., 2008). Strategic competition is one of the critical factors that account for this difference. In our model, the competition
between the two supply chains is considered. Competition reduces the double marginalization effect. Observe that this find-
ing differs from that in the marketing literature on CS, which argues that the manufacturer against strategy I should choose
strategy I (Gupta and Loulou, 1998). Gupta and Loulou (1998) assume that the simultaneous pricing game is played.
However, under the MF scenario, the integrated manufacturer offers the retail price before the rival retailer makes the price
122 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129

1M
0.7

0.6

0.5

0.4 ID

0.3 DD
DI
0.2
II
0.1

d
0.05 0.10 0.15 0.20

Fig. 7. The profit under MF vs. price elasticity.

1M

0.53
DD

0.52 ID

0.51

0.50

0.04 0.06 0.08 0.10 0.12

Fig. 8. The profit under MF vs. leadtime sensitivity.

decision. We will further explain it in the SP model. It also differs from Boyaci and Gallego (2004) who find that integration
(coordination) is a dominant strategy for both supply chains under the assumption of the exogenous unit wholesale price (so
no double marginalization effect). The double marginalization effect influences the supply chain profit, which is considered
in our model.
Result 1 indicates that the two manufacturers may adopt different CS strategies, i.e., playing a classic hawk-dove game, where
integration and decentralization correspond to the hawk and dove strategies, respectively. Result 1 answers the question as
to when they should play a hawk-dove game. This result may be counter-intuitive as one expects that symmetric manufac-
turers in position should choose the same CS strategy. Hence, why do they play a hawk-dove game? In fact, a higher price
elasticity increases the negative effect of decentralization on market demand. As we all know, given the rival’s strategy I, the
manufacturer would like to choose strategy D to reduce the conflict when the price elasticity is not too large. Given the rival’s
strategy D, using strategy I can achieve a higher market demand than using strategy D. On the other hand, using strategy I
results in a shorter leadtime than the one using strategy D, which incurs a higher leadtime-dependent cost; and the unit
profit of the decentralized manufacturer is higher than that of the integrated manufacturer because the decentralization
CS decision dampens the price competition. Note that a higher price elasticity expands the negative effect of decentralization
on demand. As a result, when the price elasticity is higher than 0.03, using strategy I against strategy D is more profitable
than using strategy D. This finding differs from the findings reported in Irmen (1997) who suggests that they adopt the same
CS strategy in the price-only competition. Irmen (1997) assumes that the two chains offer the price simultaneously and does
not consider the leadtime competition. However, under the MF scenario, the integrated manufacturer has a pricing advan-
tage over the rival retailer and the leadtime competition is considered. We will further explain it in the SP scenario model. In
addition, the manufacturer against strategy D should choose strategy D when the price elasticity is very small (smaller than
0.03), which is consistent with Irmen (1997).

Result 2. When the price elasticity is not too large (smaller than 0.1), a higher leadtime sensitivity/leadtime cost expands the range
in which the two manufacturers adopt different CS strategies (ID or DI), and shrinks the range in which both manufacturers adopt
strategy decentralization (DD).
On one hand, decentralization increases the quoted leadtime, which reduces the leadtime-dependent cost. When the
leadtime sensitivity increases, the manufacturer decreases the quoted leadtime, which increases the leadtime-dependent
cost. On the other hand, under symmetric decentralization, Proposition 2 implies that the leadtime sensitivity does not affect
 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129 123

the unit profit of the decentralized manufacturer; however, in the asymmetric CS setting, when the leadtime sensitivity
increases, the integrated manufacturer offers a higher retail price to achieve a higher unit profit, which raises the integrated
manufacturer’s profit. As a result, when the rival uses strategy D, a higher leadtime sensitivity increases the incentive to use
strategy I.

5. Alternative models

Note that in the symmetric decentralized (DD) setting, the equilibrium outcomes under the three pricing game scenarios
are identical (please refer to subsection 4.1.2). We use subscript ‘‘i” to represent alternative model i; i ¼ 1; 2; 3.

5.1. The SP scenario

Proposition 4 summarizes the equilibrium decisions under the SP scenario.

Proposition 4. Assume b < b ^3 ¼ ð1  2cdÞ3 ð3 þ 5d þ 2d2 Þ=½16að1 þ 2dÞ3 . For the SP scenario, we have: (i) Under II, the SPNE
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
decisions are pIIi1 ¼ ½1 þ 2cð1 þ dÞ=ð2 þ 4dÞ and LIIi1 ¼ bð3 þ 8d þ 4d Þ=½að1 þ dÞð1  2cdÞ; at the equilibrium, the profit of
2
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
 ð1þdÞð12cdÞ2 ab > 0; (ii) under ID, the SPNE decisions are
2
manufacturer i is pIIiM ¼ ð1þdÞð12cdÞ
2
4ð1þ2dÞ 3þ8dþ4d

11 ¼ c=2 þ ½ð1 þ cÞð3 þ 2dÞ þ 2m21 ð1 þ dÞ  2að1 þ 2dÞðL11  L21 Þ=ð6 þ 16d þ 8d Þ;
ID ID 2
pID ID

21 ¼ ðc þ m21 Þ=2 þ ½ð1 þ cÞð3 þ 2dÞ þ m21 þ 2að1 þ 2dÞðL11  L21 Þ=ð6 þ 16d þ 8d Þ;
ID ID 2
pID ID ID

qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
LID ID
21 ¼ L21 ðm21 Þ ¼
ID
bð3 þ 2dÞ=½að1 þ dÞmID ID
21 ; ðL11 ; m21 Þ is the solution of the first-order conditions ð3 þ 2dÞð1  2cdÞ 
ID

4m2 ð1 þ 4d þ 2d Þ þ 2að1 þ 2dÞðL1  LID bð1 þ 2dÞð3 þ 2dÞ  að1 þ dÞL21 ½ð3 þ 2dÞð1  2cdÞ þ 2að1 þ 2dÞ
2 2
21 ðm2 ÞÞ ¼ 0 and
 qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ðL1 ; m2 Þj0 < L1 < bð3 þ 2dÞ =½a2 ð1 þ dÞ; m2 > 0; LID
2
ðLID
3
21 ðm2 Þ  L1 Þ þ m2 ð2 þ 2dÞ ¼ 0 in the set 21 ðm2 Þ <
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
4bð3 þ 14d þ 14d þ 4d Þ=½a2 ð1 þ 3d þ 2d Þg.
3 2 3 2

Note that the assumption of b < b ^3 ensures the existence of a unique equilibrium outcome and a positive profit for man-
ufacturer i. Under the asymmetric strategy profile, the interaction between the price and quoted leadtime decisions exists.
Intuitively, under the asymmetric strategy profile, there exists a quoted leadtime difference between the two manufacturers,
which affects the market demand as well as the prices. However, when the CS strategies are symmetric, the quoted leadtime
difference disappears such that the quoted leadtime decision does not affect the purchase behavior of consumers as well as
the price decisions.
Fig. 9 illustrates how the quoted leadtime under the SP scenario depends on the price elasticity. Figs. 10 and 11 illustrate
how the manufacturer’s profit under the SP scenario depends on the parameters d and a, where d ¼ 0:067 and the values of
the other parameters are the same as those in Figs. 3–6. Since the effect of b on the manufacturer’s profit is similar to that of
a, we omit it to save space.
From Fig. 9, we see that under symmetric strategy profiles, the quoted leadtime under symmetric decentralization is
shorter than that under symmetric integration when the price elasticity is sufficiently low, which is contrary to the finding
under the MF scenario (see Corollary 1 and Fig. 4). In other words, the pricing game scenario can reverse the effect of symmetric
decentralization on the quoted leadtime.

L 11

3.5
DI

3.0
II
DD
d
0.05 0.10 0.15 0.20
ID
2.0

Fig. 9. The quoted leadtime under SP vs. price elasticity.

124 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129

1M 1
0.7

0.6
DD
0.5

0.4 ID

0.3

0.2 II

0.1
DI
d
0.05 0.10 0.15 0.20

Fig. 10. The profit under SP vs. price elasticity.

1M 1
0.40
DD
0.35 ID

0.30

0.25

0.20
II

0.02 DI 0.04 0.06 0.08 0.10

0.10

Fig. 11. The profit under SP vs. leadtime sensitivity.

From Figs. 10 and 11, we see that under the SP scenario, when the rival chooses strategy I, the manufacturer has an incen-
tive to choose strategy I, which is consistent with Gupta and Loulou (1998). However, it is different from that under the MF
scenario (see Result 1). This implies that asymmetry in pricing power of firms with different CS strategies is a key factor for
the two manufacturers to use different CS strategies ðI; DÞ and ðD; IÞ. A manufacturer against strategy D would adopt strategy
D only when both the price elasticity d and the leadtime sensitivity a are sufficiently small, which is consistent with those
under the MF scenario.

5.2. The RF scenario

From the time sequences of games, we know that in the II setting, the equilibrium outcome under the RF scenario is the
same as that under the SP scenario. Thus, we only need to consider the ID setting.
Similar to Proposition 4, we derive Proposition 5.

Proposition 5. Under ID for the RF scenario, the SPNE decisions are:

22 ð1 þ 4d þ 2d Þ þ 2að1 þ 6d þ 4d ÞðL22  L12 Þ

2 ID ID 2 2
5 þ 8c þ 2dð5 þ 15c þ 2d þ 14cd þ 4cd Þ þ 2mID
12 ¼
pID 2
;
8ð1 þ dÞð1 þ 4d þ 2d Þ
 
22 ð1 þ 4d þ 2d Þ þ 2að1 þ 2dÞ L12  L22
2 ID ID
3 þ 4c þ 2dð1 þ 5c þ 2cdÞ þ 2mID
22 ¼
pID 2
;
4 þ 16d þ 8d
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
  
LID ID
22 ¼ L22 ðm22 Þ ¼ 2
ID
bð1 þ dÞ= amID and LID
22 ð1 þ 2dÞ ,
12 ; m22
ID
is the solution of the first-order conditions
 
ð3 þ 2dÞð1  2cdÞ  4m2 ð1 þ 4d þ 2d Þ þ 2að1 þ 2dÞ L1  L22 ðm2 Þ ¼ 0 and
2 ID

h
2 2
16bð1 þ dÞð1 þ 4d þ 2d Þ ¼ aL21 ð1 þ 6d þ 4d Þ ð1  2cdÞð5 þ 10d þ 4d Þ þ 2m2 ð1 þ 4d þ 2d Þ
2 2 2

 i
þ 2að1 þ 6d þ 4d Þ LID
2
22 ðm2 Þ  L1 ;
 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129 125

in the set
 qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2 2 2 2
ðL1 ; m2 Þj0 < L1 < 16bð1 þ dÞð1 þ 4d þ 2d Þ =½a2 ð1 þ 6d þ 4d Þ ; m2 > 0;
3

qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi

2bð1 þ 5d þ 6d þ 2d Þ=ða þ 2daÞ :

3 2 3 2
LID
22 ðm 2 Þ < 2

Fig. 12 illustrates how the quoted leadtime under the RF scenario depends on the price elasticity, and Fig. 13 illustrates
how the manufacturer’s profit under the RF scenario depends on the parameter a, where the values of parameters are the
same as those in Figs. 5 and 6.
Fig. 12 indicates that under the RF scenario, given the rival’s strategy D, decentralization of the supply chain decreases the
quoted leadtime if the price elasticity is sufficiently low, which is contrary to the other two pricing game scenarios under
which decentralization always increases the quoted leadtime. In short, the effect of decentralization on the quoted leadtime
largely depends on the pricing game scenario. However, under the asymmetric strategy profile, the decentralized manufac-
turer quotes a longer leadtime than the integrated one for each scenario.
Fig. 13 implies that under the RF scenario, an entrant facing the integrated incumbent manufacturer has an incentive to
choose strategy I; facing the decentralized incumbent manufacturer, an entrant has an incentive to adopt strategy D only
when the leadtime sensitivity is sufficiently low, which is consistent with that under the other game scenarios. The effect
of the price elasticity on the manufacturer’s profit is similar to Fig. 10, and hence we omit it. In short, under the RF scenario,
the effects of parameters on CS decision are similar to those under the SP scenario.

5.3. Testing robustness for demand under the MF scenario

Up to now, we assume that the total demand is not sensitive to the quoted leadtime. In this subsection, we relax this
assumption to study the robustness of our results under the MF scenario. Specifically, we extend demand function (1) to
the following demand function
1

xi3 ¼  dpi þ ðpj  pi Þ  cLi  aðLi  Lj Þ; i; j ¼ 1; 2; j – i; c P 0:
2
Thus, we have
x23 ¼ 1  dðp1 þ p2 Þ  cðL1 þ L2 Þ. c reflects the leadtime elasticity of demand. A higher c decreases the
x13 þ

total market demand. Similar to Section 4, we can obtain the equilibrium decisions and the manufacturers’ profits. Since
their expressions are very complex, we omit them to save space.
To better understand the effects of the main factors on the CS decision, we depict Figs. 14 and 15, where the default values
of parameters used are listed as follows:
c ¼ 0:2; d ¼ 0:028; a ¼ 0:05; b ¼ 0:08; and c ¼ 0:01:
Since the effects of price elasticity d on the manufacturer’s profits under different CS profiles are similar to Fig. 7 (i.e., owning
robustness for the effect of dÞ, we omit it.
From Fig. 14, we know that when the rival chooses strategy D, the manufacturer’s profit increases with the leadtime sensitivity
a if a is small. This result may appear to be counterintuitive. We can explain it as follows: When the leadtime sensitivity a
increases, the quoted leadtime decreases, which further increases the total market demand and the leadtime-dependent
cost. When a is small, the positive effect of a on the manufacturer through increasing demand is dominant. Note that the
two manufacturers are symmetric. Fig. 14 implies that facing a decentralized incumbent rival, the entrant has an incentive
to choose strategy D when the leadtime sensitivity a and the price elasticity d are small, which is consistent with Fig. 8. In
other words, relaxing the demand assumption does not change the effect of a on the CS decision. Fig. 15 implies that a higher

L 12

DI

3.5

3.0

II

d
0.02 0.04 0.06 0.08 0.10 0.12
ID
DD
2.0

Fig. 12. The quoted leadtime under RF vs. price elasticity.

126 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129

1M 2

ID
0.5 DD

0.4

0.3

0.2 II

0.02 0.04 0.06 0.08 0.10

0.1
DI

Fig. 13. The profit under RF vs. leadtime sensitivity.

1M 3

0.48

0.47

ID
0.46
DD
0.45

0.05 0.10 0.15 0.20 0.25 0.30 0.35

Fig. 14. The profit under MF vs. leadtime sensitivity.

1M 3
0.52

0.50

0.48

0.46
DD
0.44
ID

0.42
0.005 0.010 0.015 0.020 0.025

Fig. 15. The profit under MF vs. leadtime elasticity.

leadtime elasticity c will expand the range under which both manufacturers choose strategy D. However, the effect of c on CS
decision is small relative to the price elasticity d. In short, the results on the CS decision under the MF scenario are robust to
demand function.

6. Conclusions

Integration and decentralization are two important CS strategies for any manufacturer. In the MTO business scenario,
there exist interactions among retail price and quoted leadtime, which both affect the profitability of manufacturers. We
have developed in this paper duopoly gaming models to explore how these interactions influence the CS strategy of the
MTO manufacturers and examine the effect of CS strategy on the quoted leadtime. We have studied how some key factors
influence the CS decision under the three different pricing game scenarios.
Under the MF scenario, we have revealed that (i) decentralization of the supply chain increases the quoted leadtime; (ii) if
a manufacturer wants to enter a market where the incumbent competitor is an integrated manufacturer, the entrant may
want to choose a decentralized channel structure when the price elasticity is not too high; (iii) both manufacturers may
 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129 127

choose different CS strategies even when they are fully symmetric; and (iv) facing the decentralized incumbent competitor,
the entrant wants to choose a decentralized channel structure when the leadtime sensitivity/leadtime cost factor and price
elasticity are very small.
Under the SP and RF scenarios, we have found that facing the integrated incumbent manufacturer, the entrant wants to
choose the integrated channel structure. We have also derived the conditions under which the manufacturer against decen-
tralization would choose the decentralized channel structure. By comparing the quoted leadtimes under the three game sce-
narios, we have shown that the effect of decentralization of the supply chain on the quoted leadtime depends on the pricing
game scenario to a large degree.
This paper contributes to the literature by providing some new and solid insights that are important and different from
the existing literature. Researchers in the field should find our results interesting because we have explained CS strategies of
MTO manufacturers from a comprehensive perspective (in particular, the pricing game scenario, and the interaction between
price and leadtime). Practitioners could also make reference to our findings in shaping their CS strategies and quoted lead-
time decision. For further research, the effect of the quoted leadtime on the total demand can be incorporated into the anal-
ysis. However, it will be a very challenging extension because the resulting model is very complex. In this paper, we do not
consider the effect of incentive contract on equilibrium outcome. One can extend it to the case with the design of an appro-
priate incentive scheme and examine the contract’s effect on the equilibrium outcome.

Acknowledgments

The authors would like to thank the editor, two anonymous referees for their valuable suggestions and insightful com-
ments that have significantly improved the presentation of this paper. Tiaojun Xiao’s research was supported in part by:
(i) China National Funds for Distinguished Young Scientists under Grant 71425001; and (ii) the National Natural Science
Foundation of China under Grant 71371093. Tsan-Ming Choi’s research was partially supported by The Hong Kong Polytech-
nic University (project number: G-YK71). T.C.E. Cheng was supported in part by The Hong Kong Polytechnic University under
the Fung Yiu King – Wing Hang Bank Endowed Professorship in Business Administration.

Appendix A

Proof of Proposition 1. From Eq. (5), we know that the first-order conditions are

@ pIIiM =@pi ¼ 1=2 þ cð1 þ dÞ  2ð1 þ dÞp1 þ p2  aL1 þ aL2 ¼ 0;

@ pIIiM =@Li ¼ ca  pi a þ b=L2i ¼ 0:

pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
We can show that the Hessian matrix of pIIiM over ðLi ; pi Þ is negatively definite if and only if Li 6 3 4bð1 þ dÞ=a2 . When Li is
very long, the market demand is zero such that the profit of the integrated manufacturer i tends to zero as Li increases. Note
that the two manufacturers are symmetric in position. Solving the first-order conditions for ðLi ; pi Þ, we have
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
pII1 ¼ pII2 ¼ 1þ2cð1þdÞ
2þ4d
and LII1 ¼ LII2 ¼ að1þ2dÞb
ð1=2cdÞ
. Further, we can obtain pIIiM , given by Proposition 1. Solving pIIiM ¼ 0 for b, we obtain
b ^1 , we find that the Hessian matrix is negatively definite at point ðLII ; pII Þ and
^1 . From b < b pIIiM > 0. Thus, ðLIIi ; pIIi Þ is the
i i
equilibrium decisions when b < b ^1 . Furthermore, we can obtain the demands. h

Proof of Proposition 2. Inserting Eq. (6) into Eqs. (1) and (3), we can obtain pDD
iM ðL1 ; L2 ; m1 ; m2 Þ. The Hessian matrix of
pDD
iM ðL1 ; L2 ; m1 ; m2 Þ is as follows:
!
2b=L3i að1 þ dÞ=ð3 þ 2dÞ
H¼
að1 þ dÞ=ð3 þ 2dÞ 2ð1 þ dÞð1 þ 4d þ 2d Þ=ð3 þ 8d þ 4d Þ
2 2

qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
4bð3 þ 14d þ 14d þ 4d Þ=½a2 ð1 þ 3d þ 2d Þ.
3 2 3 2
which is negatively definite if Li <
The first-order conditions of pDD
iM ðL1 ; L2 ; m1 ; m2 Þ over ðLi ; mi Þ are as follows:
h i.h i
@ pDD
iM ðL1 ; L2 ; m1 ; m2 Þ=@Li ¼ bð3 þ 2dÞ  ð1 þ dÞami Li
2
L2i ð3 þ 2dÞ ¼ 0; ðA1Þ

@ pDD
iM ðL1 ; L2 ; m1 ; m2 Þ=@mi ¼ 0: ðA2Þ
Solving Eq. (A1) for Li , we have
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
LDD
i ðmi Þ ¼ ð3 þ 2dÞb=½ami ð1 þ dÞ:
128 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129

Note that the two manufacturers are symmetric in position. At equilibrium, we have m2 ¼ m1 . Substituting m2 ¼ m1 and
2
LDD
i ðmi Þ into the first-order condition (A2), we can obtain mi
DD
¼ ð3 þ 2dÞð1  2cdÞ=ð2 þ 14d þ 8d Þ. If Li is very large, market
demand for chain i is zero and manufacturer i will at most make a zero profit. Solving pDD ¼ 0 for b, we obtain b ^2 . From
iM
^2 , it follows that
b<b pDD
iM is positive. h

Proof of Corollary 1. From Propositions 1 and 2, it follows that

2 2
ðLDD
i Þ 1 þ 7d þ 4d
2
¼ 2
P 1:
ðLIIi Þ 1 þ 3d þ 2d

Thus, we have LDD

i P LIIi . h

Proof of Proposition 3. Similar to Proposition 2, we can show that the second-order condition of pID 1M is satisfied if
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
L1 < 2 bð1 þ 5d þ 6d þ 2d Þ=ða þ 2daÞ and the infinite leadtime is not optimal; and the second-order condition of pID
3 2 3 2
2M
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
is L2 < 2 3 bð1 þ dÞ=a2 . The first-order conditions of (8) and (9) are

@ pID
1M =@L1 ¼ b=L1  að1 þ 2dÞðp1  cÞ=½2ð1 þ dÞ ¼ 0;
2
ðA3Þ

@ pID
1M =@p1 ¼ 0; ðA4Þ

@ pID
2M =@L2 ¼ b=L2  am2 =2 ¼ 0; and
2
ðA5Þ

@ pID
2M =@m2 ¼ ½1  2ð1 þ dÞðc þ 2m2 Þ þ 2p1 þ 2aL1  2aL2 =4 ¼ 0: ðA6Þ
From Eqs. (A3) and (A5), we obtain
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
LID
1 ðp1 Þ ¼ 2bð1 þ dÞ=½að1 þ 2dÞðp1  cÞ and LID 2 ðm2 Þ ¼ 2b=ðam2 Þ:

Inserting them into the first-order conditions (A4) and (A6), we can obtain the equivalent first-order conditions, given by
Proposition 3. h

Proof of Proposition 4. Part (i) From Eq. (4), we see that under II, piM is a concave function of pi . Solving the first-order con-
3þ2cð3þ5dþ2d2 Þ2aLi þ2aLj þdð24aLi þ4aLj Þ
ditions @ piM =@pi ¼ 0 (i ¼ 1; 2) for ðp1 ; p2 Þ, we have pIIi1 ðL1 ; L2 Þ ¼ 6þ16dþ8d2
. Inserting pIIi1 ðL1 ; L2 Þ into
ð1þdÞ½ð3þ2dÞð12cdÞ2aðL L Þð1þ2dÞ 2
Eq. (4), we obtain pIIiM1 ðL1 ; L2 Þ ¼ 2
i j
 Lbi , which is a concave function of Li when
4ð3þ8dþ4d2 Þ
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
Li < bð3 þ 2dÞ =½a2 ð1 þ dÞ. If Li is very large, the demand for the integrated manufacturer i is zero such that it achieves
3 2

a non-positive profit. Since the two manufacturers are symmetric, we have L1 ¼ L2 . Solving the first-order conditions
^3 , we see that the second-order condition is satisfied at LII and the manufac-
@ pIIiM1 ðL1 ; L2 Þ=@Li ¼ 0, we obtain LIIi1 . From b < b i1
turer obtains a positive profit.
Part (ii) From Eqs. (2) and (4), we know that the profits of both the integrated manufacturer and the retailer are concave
functions of their retail prices, i.e., the second-order conditions are satisfied. Under ID, solving the first-order conditions
@ p1M =@p1 ¼ 0 and @ p2R =@p2 ¼ 0, we obtain

11 ðL1 ; L2 ; m2 Þ ¼ c=2 þ ½ð1 þ cÞð3 þ 2dÞ þ 2m2 ð1 þ dÞ  2að1 þ 2dÞðL1  L2 Þ=ð6 þ 16d þ 8d Þ;
2
pID

21 ðL1 ; L2 ; m2 Þ ¼ ðc þ m2 Þ=2 þ ½ð1 þ cÞð3 þ 2dÞ þ m2 þ 2að1 þ 2dÞðL1  L2 Þ=ð6 þ 16d þ 8d Þ:

2
pID
Inserting them into Eq. (2), we can obtain pID 2R1 ðL1 ; L2 ; m2 Þ, which is positive (i.e., p2R1 ðL1 ; L2 ; m2 Þ > 0Þ. Inserting them into
ID

Eqs. (3) and (4), we can obtain pID 1M1 1 ðL ; L 2 ; m 2 Þ and p ID

ðL
2M1 1 ; L2 ; m 2 Þ. p ID
ðL
1M1 1 ; L2 ; m2 Þ is a concave function of L1 if
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
L1 < bð3 þ 2dÞ =½a2 ð1 þ dÞ
3 2
and p2M1 ðL1 ; L2 ; m2 Þ
ID
is a jointly concave function of ðL2 ; m2 Þ if
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
L2 < 4bð3 þ 14d þ 14d þ 4d Þ=½a2 ð1 þ 3d þ 2d Þ. Similar to Part (i), the two manufacturers will not offer a very long
3 2 3 2

quoted leadtime. The first-order conditions are as follows:

b að1 þ dÞ½ð3 þ 2dÞð1  2cdÞ þ 2að1 þ 2dÞðL2  L1 Þ þ m2 ð2 þ 2dÞ

@ pID
1M1 ðL1 ; L2 ; m2 Þ=@L1 ¼  ¼ 0;
L21 ð1 þ 2dÞð3 þ 2dÞ
2
 T. Xiao et al. / Transportation Research Part E 87 (2016) 113–129 129

@ pID
2M1 ðL1 ; L2 ; m2 Þ=@L2 ¼ b=L2  am2 ð1 þ dÞ=ð3 þ 2dÞ ¼ 0;
2

@ pID
2M1 ðL1 ; L2 ; m2 Þ=@m2 ¼ ð1 þ dÞ½ð3 þ 2dÞð1  2cdÞ  4m2 ð1 þ 4d þ 2d Þ þ 2að1 þ 2dÞðL1  L2 Þ=ð6 þ 16d þ 8d Þ ¼ 0:
2 2

Solving @ pID ID
2M1 ðL1 ; L2 ; m2 Þ=@L2 ¼ 0 for L2 , we obtain L21 ðm2 Þ. Further, we can obtain the equivalent first-order conditions. h

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