Omega 53 (2015) 11–20

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Omega
journal homepage: www.elsevier.com/locate/omega

Free or bundled: Channel selection decisions under different

power structures$
Xu Chen a,n, Xiaojun Wang b,1
a
School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, PR China
b
School of Economics, Finance and Management, University of Bristol, Bristol BS8 1TZ, UK

art ic l e i nf o a b s t r a c t

Article history: The smart phone industry has unique supply chain relationships. Companies at all levels of the supply
Received 16 June 2014 chain compete and coordinate with each other for market share and profit. This paper examines the
Accepted 24 November 2014 impact of power structures on the decision of pricing and channel selection between a free channel and
Available online 3 December 2014
a bundled channel. We investigate the smart phone supply chain that consists of a handset manufacturer
Keywords: and a telecom service operator. Based on game theory models, the manufacturer's optimal retail pricing
Service operations policies in free and bundled channels and the telecom service operator's optimal subsidy policies in a
Channel selection bundled channel are derived under different power structures. It is demonstrated that the firm that has
Pricing higher channel power will gain more profit, and the smart phone supply chain's profit in a Vertical Nash
Power structure
(VN) power structure is higher than that in Telecom Service Operator-Stackelberg (TS) and
Game theory
Manufacturer-Stackelberg (MS) power structures. It is also shown that the smart phone supply chain
will choose a bundled channel in TS and MS power structures under certain conditions and will select a
free channel in a VN power structure.
& 2014 Elsevier Ltd. All rights reserved.

1. Introduction involves the strategic process of coordinating companies within

Consider a consumer looking for a new smart phone. When
picking a smart phone handset from various models and manu-
facturers, the consumer has to choose a service package ranging
from “pay as you go” to various tariff contracts among different
telecom service operators. The relationship with the ultimate
customers is determined by the complete combination of product
features and telecom services offered by a unique supply chain
setting [14]. On one hand, a telecom service operator cannot
provide good quality telecommunication and data service without
a good quality functioning handset produced by manufacturers.
On the other hand, the innovative functions developed by a
handset manufacturer cannot be materialized without a fast and
reliable data service provided by telecom service operators. The
handset and service package themselves and the prices charged
for both the handset and service are all influential in the consumer
purchasing decision. Different from traditional supply chain man-
agement that often focuses on delivering a product or service, this
☆
This manuscript was processed by Associate Editor Eksioglu.
n
Corresponding author. Tel.: þ 86 28 83206622.
E-mail addresses: xchenxchen@263.net (X. Chen),
xiaojun.wang@bristol.ac.uk (X. Wang).
1
Tel.: þ44 117 928 8608.
the supply chain to competitively deliver both service and product
to the end customers.
Adding to the complexity of the decision problem, customers
can choose their handsets and services as a bundled package from
manufacturers (e.g., Apple Store), telecom service operators, and
third party smart phone retailers, or alternatively, they can buy
handsets from manufacturers and services from telecom service
operators separately. Here we use the terms, bundled channel and
free channel, to describe the two different channels above,
respectively. In a bundled channel, a manufacture designs a smart
phone handset to work exclusively with a single telecom service
operator, and customers have to buy the handset and the service
together from either the manufacturer or the telecom service
operator. In a free channel, the manufacturer works with multiple
telecom service operators and customers can buy the handset
from the manufacturer and the telecom service from a telecom
service operator separately. Both bundled channel and free chan-
nel are popular in many world leading smart phone markets
including China, the United States (US), and the United Kingdom
(UK). For example, consumers in these countries can buy iPhones
from Apple stores either as a standalone handset or as a handset
bundled with a service contract. Alternatively, consumers can also
buy a bundled package from telecom service operators. However,
the prices consumers pay for their smart phone handsets varies

http://dx.doi.org/10.1016/j.omega.2014.11.008
0305-0483/& 2014 Elsevier Ltd. All rights reserved.
12 X. Chen, X. Wang / Omega 53 (2015) 11–20
significantly depending on where they purchase handsets and
which service package they choose.
This price variation is obscured by the bundling of product and
service and various subsidies in the supply chain. Furthermore, the
pricing and subsidy policies of manufacturers and service opera-
tors are affected by their power in the relative market and supply
chain against each other and against customers. A dominant
power relationship with other supply chain members not only
enables firms to force through their strategic and operational
decisions from other supply chain members but also allows them
to be the driving force in the negotiation of subsidies. To manage
supply chains strategically and operationally, it is important that
power structures that exist in the supply chains are properly
understood by managers [13]. Although power issues such as
market power [30,1], channel power [23,33], and supply chain
power [13,2,6,45] were widely explored in the marketing and
operations management literature, to our knowledge, the power
effect on channel selection, pricing and subsidy decisions has not
been analyzed in a unique supply chain setting. Therefore, in this
paper, three classic power structures [9,20,3]: Telecom Service
Operator-Stackelberg (TS), Vertical Nash (VN) and Manufacturer-
Stackelberg (MS) are taken into consideration in examining their
influences on channel selection, pricing and subsidy decisions.
Channel management has received increasing attention from
scholars and practitioners in recent years. There is a stream of
marketing and operations research literature on the problem of
channel management. There is also extensive economics literature
examining firms' behavior under competition and the effect of
strategic alliance. However, to the best of our knowledge, there are
no published papers that place the channel selection problem in a
supply chain model in which end consumers can buy their product
and service from upstream manufacturer(s) and downstream
service operator(s), respectively, or can buy product and service
bundled packages directly from either parties, examine the impact
of different power structures on these decisions, or specify pricing
and subsidy policies that enable manufacturers and service opera-
tors to coordinate decisions. In a competitive marketplace with a
growing need for customer orientation, both manufacturers and
service operators should look beyond their organizational bound-
aries to develop and leverage their supply chain partners'
resources and capabilities to create superior value. Our objective
is to contribute in addressing the aforementioned research gap by
presenting an analytical model and analysis method for simulta-
neously modeling and estimating optimal pricing and channel
selection policies under different power structures.
The pricing, subsidy and channel selection problems are inves-
tigated in a supply chain setting that consists of a manufacturer
and a service operator and has different power structures. The
manufacturer may directly sell smart phone handsets to consu-
mers in a free channel or sell them through a telecom service
operator in a bundled channel. In contrast to high prices and a
huge discrepancy of handsets in the smart phone market due to a
short product life cycle and rapid technological development, the
service price is relatively more stable. Therefore, in addition to the
channel selection problem, this research mainly focuses on hand-
sets manufacturer's pricing policies. Several key questions are
addressed in this article.
 What are the smart phone manufacturer's optimal retail pri-
cing policies in a free channel and bundled channel under
different power structures?
 What are the telecom service operator's optimal subsidy
policies in a bundled channel under different power structures?
 What are the smart phone supply chain's optimal channel
selection policies (free channel or bundled channel) under
different power structures?
After a review of the literature in Section 2, the model
formulation and assumptions are presented in Section 3. In
Section 4 the pricing policy in a free channel is discussed. In
Section 5, the pricing policies and subsidy policies in a bundled
channel and the effect of different power structures are discussed
separately. In Section 6, we focus on channel selection policies for
the smart phone supply chain. The effects of channel selection
decisions, pricing decisions and subsidy decisions on the supply
chain performance are analyzed. The analysis results will help
firms in the smart phone industry adopt proper strategies. In
Section 7, a numerical example is provided to demonstrate the
validity of the proposed models. Finally, we discuss managerial
insights and consider directions for future work in Section 8.
2. Literature review
The importance of channel selection and pricing to the compe-
titiveness of a supply chain has been recognized in practice and
literature for some time. A considerable amount of prior work has
been conducted in the areas of competitive pricing effects e.g.,
economic work on cross-price effects [31,19]; the literature on
price image [12,18]; price wars [37]; optimal pricing on product
decision models [15,26,27,39]; and some recent reviews on retail
pricing [29,28,17]. More relevant to the setting of this research,
Choi [10] models price competition in a channel structure con-
sisting of duopoly manufacturers and duopoly common retailers.
This research finds that product differentiation helps manufac-
turers but hurts retailers and store differentiation helps retailers
but hurts manufacturers conversely. Cattani et al. [5] investigate
pricing strategies of both the manufacturer and retailer when a
direct internet channel in introduced by a manufacturer. Their
finding indicates that if the retail channel is considerably more
convenient than the Internet Channel, a consistent pricing strategy
is appropriate.
The literature on channel selection and coordination has been
rich and the marketing literature on these issues also focuses on
pricing decisions. Jeuland and Shugan [22] consider a simple
channel with one retailer and one supplier and find that the
supply chain can be coordinated by that a simple quantity
discount. Chiang et al. [8] examine the impact of customer channel
preference on dual-channel supply-chain design problems. Their
study finds that setting up a direct channel to compete with its
retailer is beneficial for a manufacturer if consumers are assumed
to have a common positive preference for the local retailer. Tsay
and Agrawal [36] study retail and direct channels and their finding
indicates that both the retailer and manufacturer would benefit
from a dual channel if the manufacturer is willing to reduce the
whole sale price. They also suggest that the preference for an
alternative channel is dependent on marketing capability and
supply chain efficiency. Cai [4] investigates the influence of four
supply chain structures with and without coordination on the
supplier and retailer. Their finding suggests that the channel
selection and coordination preferences depend on parameters
such as channel base demand, channel substitutability and opera-
tional cost. Khouja et al. [24] analyze channel selection and pricing
in the presence of retail-captive consumers. Their findings indicate
that their variables (including the customer distribution among
the retail-captive and hybrid segments, their channel preference
and the relative values of unit cost in the retail channel and direct
channel) determine optimal channel choice.
Another relevant stream of literature looks into channel selec-
tion and pricing problems from the supply chain management
perspective. Cohen and Whang [11] adopt a game-theoretic frame-
work to study the competition for the provision of after-sales
service between the manufacturer and an independent service
 X. Chen, X. Wang / Omega 53 (2015) 11–20
operator. In their paper, they mainly focus on the after-sale service
from the product point of view, which is different from the smart
phone supply chain where the telecom service operator is inde-
pendent. Wang [40] studies a two-echelon supply chain with
multiple manufacturers and one retailer. The research focuses on
decentralized production-pricing decisions on complementary
products and how supply chain performance is affected by these
decisions. Wu et al. [41] use a principal-agent framework to study
a supply chain that consists of a newsvendor and an advertiser.
The optimal decisions are analyzed in their research for both a
price-taking and a price-setting newsvendor when the advertiser
has private information regarding its willingness to pay for
advertisements. Based on this work, Wu et al. [42] extend their
model to multiple advertisers and discuss the impact of the
number of advertisers on the newsvendor's optimal decisions.
Recently, Chen et al. [7] study a two-echelon supply chain, in
which, one manufacturer and two competing retailers are con-
sidered with warranty period-dependent demands. In their paper,
the manufacturer's pricing strategies are examined in the cases of
symmetrical and asymmetrical sales cost information and the
warranty service also depends on the product and is not indepen-
dent. Zhang et al. [43] examine the effects of reference-price on
the equilibrium pricing strategies for a two-echelon competitive
supply chain in a bilateral monopoly setting. Dedrick et al. [14]
analyze the distribution of value in the mobile phone supply chain
based on product-level data, and find that carriers and handset
makers capture the most value from each handset. Nevertheless,
the different power structures in mobile phone supply chains are
ignored and a qualitative approach is used in the study. Overall,
there is rich literature on the traditional supply chain, which
consists of sequential upstream manufacturer(s) and downstream
retailer(s), but there are rare studies on supply chain models with
upstream manufacturer(s) and downstream service provider
(s) dealing with end consumers directly.
There is also a stream of literature that studies the impacts of
power structure on various aspects of channel management. Choi
[9] analyses the effects of power structure on manufacturers'
decisions for selling through a retailer. Ertek and Griffin [16]
investigate the effect of power structure on price, profits and
sensitivity of the market price in a two-stage supply chain. The
research analyses the case where the buyer has dominant bargain-
ing power and the case where the supplier has dominant bargain-
ing power. Raju and Zhang [33] look at channel coordination in the
context of a retailer Stackelberg and their finding shows that a
channel can be coordinated through either quantity discounts or a
menu of two-part tariffs to the manufacturer's benefit. Using a
similar power structure setting, Kolay and Shaffer [25] study
channel coordination and contract design when an upstream firm
sells its products in a downstream market, and their finding
indicates that quantity discounts and two-part tariffs can be
mechanisms for channel coordination under some conditions.
From Supplier-Stackelberg, Retailer-Stackelberg, and Nash game
theoretical perspectives, Cai et al. [3] examine the impact of price
discounts and price schemes on the dual-channel supply chain
competition. Their analysis shows that the simple price discount
contracts can effectively improve the performance of both the
supplier and retailer, and a consistent pricing scheme can ease the
channel conflict though inducing more profit to the retailer. Using
a similar game-theory-based framework, Zhang et al. [44] study
the effect of products' substitutability and channel position on
pricing decision under different power structures in two dual-
exclusive channels. Their research finding indicates that the
Vertical Nash game is equilibrium for the supply chain members
and no power structure is always the best for the entire supply
chain. Shi et al. [34] examine the impacts of power structure on
supply chains with uncertain demand. Manufacturer and retailer
13
Stackelberg games are used in their research to model supply
chains dominated by the manufacturer and retailer, respectively
and a Nash game is utilized to model supply chains with a
balanced power structure.
Nevertheless, despite the increased attention on channel man-
agement in the marketing and supply chain literature, very few
studies have been carried on the basis of the smart phone industry,
which has seen the fastest growth for a decade. Moreover, few
papers have focused on the efficacy of different supply chain
power structures on the manufacturer, service provider, and entire
supply chain under the setting of two competing channels. Our
paper extends the existing literature by specifically examining the
impact of different power structures on pricing, subsidy and
channel selection decisions in the context of the smart phone
supply chain in which both the upstream manufacturer and
downstream service operator face consumers directly and the
product and service provided by them are essential to meet
consumers' need. One distinction of our model is that a linear
demand function depends on the product price and service price
in both the free and bundled channels. Another distinction is our
systematic consideration of optimizing pricing policies, subsidy
policies and channel selection policies to improve the profitability
of individual supply chain parties and the whole supply chain for a
smart phone supply chain with different power structures. The
main contributions of our work include: first, a study of the impact
of power structure on channel selection and pricing problems in
the smart phone supply chain; optimal pricing and subsidy
policies for the smart phone manufacturer and telecom operator;
an analysis of the implication of different power structures on
prices and profits in the free and bundled channels.
3. Model formulation and assumptions
We consider a smart phone supply chain that consists of a handset
manufacturer and a telecom service operator. The smart phone
manufacturer's unit smart phone retail price is pm , and the unit
handset manufacturing cost is cm , pm 4cm . The telecom service
operator's unit price is po , and the unit service cost is co , po 4 co .
The service price and cost cover the contract period of the service.
In a free supply chain channel, there is only one source of
revenue for the smart phone manufacturer, which is the smart
phone handset sale. In a bundled supply chain channel, the
manufacturer's revenue is the smart phone handset sale plus the
subsidy ρ (  pm o ρ o po ) from the telecom service operator. At the
same time, the telecom service operator's revenue is the service
revenue minus the subsidy ρ ( pm o ρo po ) to the smart phone
manufacturer. Furthermore, some key model assumptions are
made as follows:
 We consider the problem of channel selection in a sequential
supply chain model consisting of an upstream manufacturer and a
downstream service operator in both a free channel and bundled
channel. This assumption is widely used in the supply chain
channel management literature and is applicable to many settings
particularly those high-tech products including smart phones.
 Similar to the conventional demand function, demand is
assumed to be linear and deterministic,

 which is defined by
the equation D ðpm Þ ¼ α  β pm þ po , where α denotes the
primary demand of the smart phone manufacturer, β repre-
sents the customers' sensitivity to the smart phone retail price.
This demand function has often been used in operations
management and marketing research [7,21,32] and in some
economics research [35,38].
 The telecom service operator's unit price po , is assumed to be
fixed at first. This is also common in the smart phone market, in
14 X. Chen, X. Wang / Omega 53 (2015) 11–20

which the service price is relatively more stable compared to 5. Bundled channel models
the high prices and huge discrepancies of smart phone hand-
sets. Nevertheless, the impact of service unit price (po ) on In a bundled channel, the smart phone manufacturer has two
supply chain decisions has been analyzed from Insights 1 to revenue sources: sale revenue and subsidy from the telecom
4 of the analytical modeling section. In addition, numerical service operator; and the telecom service operator gains service
analysis has been provided to examine the effect of various revenue minus subsidy to the smart phone manufacturer.
service prices on the profit of the smart phone manufacturer The smart

phone
 manufacturer's profit in a bundled channel,
and telecom service operator under different power structures. denoted π bm pm , is
 It is assumed that both the smart phone manufacturer and the




π bm pm ¼ pm D pm cm D pm þ ρD pm
telecom service operator are rational and self-interested, that
is, each of them aims to maximize their profit. The first term is sale revenue, the second term is manufacturing
cost and the last term represents the subsidy from the telecom
service operator. Then




π bm pm ¼ pm þ ρ cm α  β pm þ po ð5Þ
4. Free channel models

When the smart phone supply chain selects a free channel, the The telecom service operator's profit in a bundled channel,
sequence of events is as follows. First, the smart phone manufac- denoted π bo ðρÞ, is
turer decides the smart phone retail price according to the



π bo ðρÞ ¼ po D pm  co D pm  ρD pm
customer demand. Then, when the customer demand is realized,
the smart phone manufacturer gains sale revenue and the telecom
service operator gains service revenue. The first term is sale revenue, the second term is service cost
The smart

phone manufacturer's profit in a free channel, and the last term represents the subsidy to smart phone manu-
denoted π fm pm , is facturer. Then






π fm pm ¼ pm D pm  cm D pm π bo ðρÞ ¼ po  ρ  co α  β pm þ po ð6Þ
The first term is sale revenue and the second term is manu-
facturing cost. Then Assume the smart phone manufacturer's marginal profit in a



 bundled channel is m, then m ¼ pm þ ρ cm , that is, pm ¼ m þ cm ρ.
π fm pm ¼ pm  cm α β pm þpo ð1Þ
By replacing pm in (6), the telecom service operator's profit in a
bundled channel (π bo ðρÞ) can also be written as

The
 telecom service operator's profit in a free channel, denoted
π fo pm , is


π bo ðρÞ ¼ po  ρ  co α  β m þ cm  ρ þ po : ð7Þ




π fo pm ¼ po D pm  co D pm

The first term is sale revenue and the second term is service
cost. Then




π fo pm ¼ po  co α  β pm þ po ð2Þ
As to the smart phone manufacturer's optimal retail price in a
free channel, denoted pfm , the following proposition is obtained:
Proposition 1. In a free channel, pfm ¼ 2β
α
þ c2m  p2o :
This proposition means that in a free channel, the smart phone
manufacturer's optimal retail price is existent and unique.
From Proposition 1, we can directly gain the following insight:
Insight 1. pfm is an increasing function of α and cm and is a
decreasing function of β and po .
This insight means that in a free channel, if the primary
demand of the smart phone manufacturer and the unit smart
phone manufacturing cost are high, the smart phone manufacturer
will set a high retail price. On the other hand, if the customers'
5.1. Telecom Service Operator Stackelberg (TS) model
In the case of a TS power structure, the smart phone manu-
facturer and telecom service operator make their decisions in
sequence. The order of events is as follows. First, the manufacturer
determines the smart phone retail price in response to the given
telecom service operator's subsidy. Then, the telecom service
operator takes the manufacturer's response function into account
for an optimal subsidy to maximize profit. Finally, when the
customer demand is realized, the smart phone manufacturer and
telecom service operator gain their revenue.
As to the smart phone manufacturer's optimal retail price (ptm )
and the telecom service operator's subsidy (ρt ) in a bundled
channel and TS power structure, the following proposition is
obtained:
Proposition 2. In a bundled channel and TS power structure,
cm co cm co α
ptm ¼ 3α
4β þ 4 þ 4  po and ρ ¼ po þ 2  2  2β:
t

sensitivity to the smart phone retail price and the telecom service
This proposition indicates that in a bundled channel and TS
operator's service price are high, the smart phone manufacturer
power structure, the smart phone manufacturer's optimal retail
will set a low retail price.
price and the telecom service operator's subsidy are existent and
From Proposition 1 and (1), we obtain the smart phone
unique.
manufacturer's maximum profit in a free channel as
From Proposition 2, we can directly gain the following insight:
  
α cm po 2 Insight 2. ptm is an increasing function of α, cm and co , and is a
π fm pfm ¼ β   ð3Þ
2β 2 2 decreasing function of β and po . ρt is an increasing function of po ,
From Proposition 1 and (2), we obtain the telecom service cm and β, and is a decreasing function of co and α.
operator's maximum profit in a free channel as
 From this insight, we know that in a bundled channel and TS
 
 α c m po
π fo pfm ¼ β po  co   : ð4Þ power structure, if the primary demand of the smart phone
2β 2 2 manufacturer, the unit manufacturing cost, and the telecom
 X. Chen, X. Wang / Omega 53 (2015) 11–20 15

service operator's service price are high, the smart phone manu- power structure as
facturer will set a high retail price. On the other hand, if customers' 

 α cm co 2
sensitivity to the smart phone retail price and the telecom service π bm pvm ¼ β   ð11Þ
3β 3 3
operator's service price are high, the manufacturer will set a low
retail price.
In addition, if the telecom service operator's service price, unit From Proposition 3 and (6), we obtain the telecom service
manufacturing cost, and customers' sensitivity to the smart phone operator's maximum profit in a bundled channel and VN power
retail price are high, the telecom service operator would give more structure as
subsidies to the smart phone manufacturer. On the other hand, if 

 α cm co 2
the service cost and primary demand of the smart phone manu- π bo ρv ¼ β   ð12Þ
facturer are high, the telecom service operator would give fewer 3β 3 3
subsidies to the smart phone manufacturer.
From Proposition 2 and (5), we obtain the smart phone Then, the smart phone supply chain's maximum
profit in a
manufacturer's maximum profit in a bundled channel and TS bundled channel and VN power structure, denoted π b pvm ; ρv , is
power structure as 

 α cm co 2
 2 π b pvm ; ρv ¼ 2β   : ð13Þ

 α c m co 3β 3 3
π bm ptm ¼ β   ð8Þ
4β 4 4

5.3. Manufacturer Stackelberg (MS) model

From Proposition 2 and (6), we obtain the telecom service
operator's maximum profit in a bundled channel and TS power In the case of a MS power structure, the telecom service
structure as operator and smart phone manufacturer make their decisions in
 2 sequence. The order of events is as follows. First, the telecom

 α cm c o service operator determines the subsidy in response to the given
π bo ρt ¼ 2β   ð9Þ
4β 4 4 smart phone retail price. Then, the manufacturer takes the telecom
service operator's response function into consideration for an
optimal smart phone retail price to maximize profit. Finally, when
Then, the smart phone supply chain's maximum profit in a

 the customer demand is realized, the manufacturer and telecom
bundled channel and TS power structure, denoted π b ptm ; ρt , is
service operator gain their revenue.
 2

 α cm co As to the smart phone manufacturer's optimal retail price (pm m)
π b ptm ; ρt ¼ 3β   : ð10Þ and the telecom service operator's subsidy (ρm ) in a bundled channel
4β 4 4
and MS power structure, the following proposition is obtained:

Proposition 4. In a bundled channel and MS power structure,

3α cm co cm 3co α
m ¼ 4β þ 4 þ 4  po and ρ ¼ po þ 4  4  4β:
pm
5.2. Vertical Nash (VN) model m

In the case of a VN power structure, the smart phone manu- This proposition means that in a bundled channel and MS
facturer and telecom service operator make their decisions simul- power structure, the smart phone manufacturer's optimal retail
taneously. The order of events is as follows. The smart phone price and the telecom service operator's subsidy are existent and
manufacturer determines the response function of smart phone unique.
retail price to maximize profit given the telecom service operator's From Proposition 4, we can directly gain the following insight:
subsidy, and the telecom service operator determines the response
m is an increasing function of α, cm and co , and is a
Insight 4. pm
function of subsidy to maximize profit given the manufacturer's decreasing function of β and po . ρm is an increasing function of po ,
retail price. Finally, when the customer demand is realized, the cm and β, and is a decreasing function of co and α.
manufacturer and telecom service operator gain their revenue.
As to the smart phone manufacturer's optimal retail price (pvm ) From this insight, we can also obtain similar management
and the telecom service operator's subsidy (ρv ) in a bundled insights to that from Insight 2.
channel and VN power structure, the following proposition is From Proposition 4 and (5), we obtain the smart phone
obtained: manufacturer's maximum profit in a bundled channel and MS
power structure as
Proposition 3. In a bundled channel and VN power structure, 
α

 α cm co 2
pvm ¼ 2α cm co cm 2co
3β þ 3 þ 3  po and ρ ¼ po þ 3  3  3β:
v π bm pmm ¼ 2β   ð14Þ
4β 4 4
From this proposition, we know that in a bundled channel and
VN power structure, the smart phone manufacturer's optimal
From Proposition 4 and (6), we obtain the telecom service
retail price and the telecom service operator's subsidy are existent
operator's maximum profit in a bundled channel and MS power
and unique.
structure as
From Proposition 3, we can directly gain the following insight:


 α cm co 2
π bo ρm ¼ β   ð15Þ
Insight 3. pvm is an increasing function of α, cm and co , and is a 4β 4 4
decreasing function of β and po . ρv is an increasing function of po ,
cm and β, and is a decreasing function of co and α.
Then, the smart phone supply chain's maximum
profit in a
From this insight, we can obtain similar management insights m; ρ
bundled channel and MS power structure, denoted π b pm m
, is
to that from Insight 2.  2

 α cm co
From Proposition 3 and (5), we obtain the smart phone π b pmm; ρ
m
¼ 3β   : ð16Þ
4β 4 4
manufacturer's maximum profit in a bundled channel and VN
16 X. Chen, X. Wang / Omega 53 (2015) 11–20
5.4. The effect of power structure
Now we discuss the effect of power structure on the smart
phone supply chain's profit in a bundled channel, and the follow-
ing proposition is obtained:

m
v



v v5. π m bp

mt 4tπm pm
4 π bm ptm , π bo ρt 4π bo ðρv Þ 4 π bo ðρm Þ
b b
Proposition
and π pm ; ρ 4 π pm ; ρ ¼ π pm ; ρ .
b b m m
This proposition means that the smart phone supply chain
member with more channel power will gain higher profit. Because
of more intense competition, the smart phone supply chain's
maximum profit in a bundled channel and VN power structure is
higher than that in other power structures (TS and MS). This is in
line with the research finding of Zhang et al. [44] that a balanced
power structure is always the best for the whole supply chain and
the Vertical Nash game is equilibrium for its members.
6. Channel selection policies for smart phone supply chain
In this section, we discuss the channel selection policies for
smart phone supply chain, and gain the following proposition:
Proposition 6. (1) In a TS power structure, if
α α
oβ o ;
2po þ cm  co ð4=3Þpo þcm  ð1=3Þco
then the smart phone supply chain will select a bundled channel; if
0 o β r ðα=2po þcm  co Þ, then the smart phone supply chain will
select a free channel. (2) In a VN power structure, the smart phone
supply chain will select a free channel. (3) In a MS power structure, if
α α
 pffiffiffi  pffiffiffi o β o  pffiffiffi  pffiffiffi ;
2 þ 2 po þ c m þ 1 þ 2 c o 2 2 þ 2 po þ c m  3 þ 2 2 c o
then the smart phone supply chain will select a bundled channel; if
α smart phone manufacturer and/or telecom service operator will gain
0oβr pffiffiffi  pffiffiffi ;
2 þ 2 po þ cm þ 1 þ 2 co
then the smart phone supply chain will select a free channel.
From this proposition, we gain the optimal channel selection
policies for a smart phone supply chain under different power
structures. In TS and MS power structures, because of different
power structures, the competition between the smart phone
manufacturer and telecom service operator is not fierce, so the
smart phone supply chain's maximum profit is lower than that in a
VN power structure, which means that there is more potential in
TS and MS power structures to improve the smart phone supply
chain's maximum profit. In TS and MS power structures, if the
customers' sensitivity to the smart phone retail price is high, the
smart phone supply chain will select a bundled channel. In this
case, the telecom service operator can motivate the smart phone
manufacturer to reduce the retail price by providing a subsidy;
thus the customers' demand increases, which benefits both the
smart phone manufacturer and the telecom service operator under
certain conditions. On the other hand, in a VN power structure,
because of the same or similar channel power, the competition
between the smart phone manufacturer and telecom service
operator is fierce. Therefore, to be more competitive, both parties
have already made an effort to improve their efficiencies; so, the
smart phone supply chain's maximum profit is higher than that in
TS and MS power structures, which means that there is less
potential in a VN power structure to improve the smart phone
supply chain's maximum profit. In this case, the smart phone
supply chain will select a free channel.
7. Numerical example
In this section, a numerical example is provided to demonstrate
the feasibility of the mathematical models and analyze the effect
of the telecom service operator's price (po ) on the profit of the
smart phone manufacturer and the telecom service operator in
different power structures. Referring to the data of China Mobile
which is the world's largest telecom operator, we specify that
α ¼ 100 unit, β ¼ 2, cm ¼ 2 thousand RMB per handset and co ¼ 1
thousand RMB per customer.  Then, we derive the smart phone
f f
manufacturer's
  profit (π m pm ) and telecom service operator's
f f
profit (π o pm ) in a free channel. In a bundled channel,
 we also
derive the smart phone manufacturer's
 profit (π bm ptm ) and the
telecom service operator's profit (π bo ρt ) in a TS power structure,


the smart phone manufacturer's profit (π bm pvm ) and telecom
service operator's profit (π o ðρ Þ) in a VN power structure, and the
b v


smart phone manufacturer's profit (π bm pm m ) and telecom service
operator's profit (π bo ðρm Þ) in a MS power structure, as shown in
Figs. 1–3.
Now we discuss the effects of the telecom service operator's
price on the profit of the smart phone manufacturer and telecom
service operator in TS, VN and MS power structures. From Fig. 1,
we know that in a free channel, the smart phone manufacturer's
profit is a decreasing function of the telecom service operator's
unit price (po ), and the telecom service operator's profit changes
from an increasing function to a deceasing function of the telecom
service operator's unit price (po ). Figs. 1–3 illustrate that the
telecom service operator's unit price (po ) has no effect on the
profits of the smart phone manufacturer and telecom service
operator in a bundled channel with different power structures.
Fig. 1 shows that in a TS power structure, if the telecom service
operator's unit price (po ) is higher than pto , then both the smart
phone manufacturer and telecom service operator will gain more
profits in a bundled channel than those in a free channel; so, the
smart phone supply chain will select a bundled channel. If the
telecom service operator's unit price (po ) is lower than pto , then the
less profits in a bundled channel than those/that in a free channel;
so, the smart phone supply chain will select a free channel.
From Fig. 2, we derive that in a VN power structure, the smart
phone manufacturer and telecom service operator will gain the
same profit in a bundled channel. At the same time, the smart
phone manufacturer and/or telecom service operator will gain less
profit in a bundled channel than those/that in a free channel; so,
the smart phone supply chain will select a free channel.
Fig. 3 indicates that in a MS power structure, if the telecom
service operator's unit price (po ) is higher than pm o , then both the
smart phone manufacturer and telecom service operator will gain
more profits in a bundled channel than those in a free channel; so,
the smart phone supply chain will select a bundled channel. If the
telecom service operator's unit price (po ) is lower than pm o , then the
1000
900
800
700
600 Πm1
500 Πo1
400 Πmt( )
300
Πot( )
200
100
0
5 15 35 45
Fig. 1. Effect of po in a TS power structure.
 X. Chen, X. Wang / Omega 53 (2015) 11–20
1000 t profit. On the other hand, from the whole smart phone supply
900
800
700
600
500
400
300
200
100
0 then formulate proper channel selection policies under different
5 15 25 35 45
Fig. 2. Effect of po in a VN power structure.
1000
900
800
700
600
500
400
300
200
100
0 opers, and telecom service operators have an opportunity to
5 15 25 35 45
Fig. 3. Effect of po in a MS power structure.
smart phone manufacturer and/or the telecom service operator will
gain less profits in a bundled channel than those/that in a free
channel; so, the smart phone supply chain will select a free channel.
8. Conclusions and suggestions for further research
This paper studies the pricing policies, subsidy policies and
channel selection policies for a smart phone supply chain with
different power structures. We take into consideration the supply
chain that consists of a smart phone manufacturer and a telecom
service operator. The smart phone industry has distinct supply
chain characteristics, in which both the manufacturer and telecom
service operator can use price and other factors to compete and
coordinate with each other. To the best of our knowledge, this is
the first study on the impact of the power structure on the channel
selection and pricing problem in the smart phone supply chain.
This research provides several interesting observations.
Observation 1. There exist unique optimal retail prices for the
smart phone manufacturer in the free channel and bundled
channel with different power structures. There are also unique
optimal subsidies for the telecom service operator in bundled
channels with different power structures. Therefore, by deriving
the optimal smart phone retail prices and the optimal subsidies in
different supply chain channel settings, the smart phone manu-
facturer and telecom service operator can develop their appro-
priate pricing and subsidy policies based on our findings to
maximize their benefits.
Observation 2. Our findings also show that different power
structures have significant impact on the profit of individual firms
and the entire smart phone supply chain's profitability. For
instance, the firm that has higher channel power will gain more
profit, and the profit of the whole smart phone supply chain in a
VN power structure is higher than that in TS and MS power
structures. On one hand, from the individual firm perspective, it is
important to enhance its supply chain power to acquire more
17
chain's perspective, it is important for decision makers to create a
balanced market environment that promotes competition
between supply chain parties.
Πm1
Observation 3. We also show that different power structures have
Πo1
an effect on the channel selection decisions for the smart phone
( )
Πmn supply chain. For example, a bundled channel will be selected in
Πon
( ) TS and MS power structures under certain conditions, and, in
contrast, a free channel will be chosen in a VN power structure.
The smart phone manufacturer and telecom service operator can
power structures to maximize their benefits.
The smart phone sector is a fast growing industry with
increasing complexity in competition and dynamic power rela-
tionship. While Apple and Samsung maintain their market lead in
the smart phone market, technology giant Google also enters the
hardware market through the acquisition of Motorola despite its
Πm1 growing market share with the Android System. While Microsoft's
Πo1
acquisition of Nokia forms a strategic force for Windows smart
( )
phones, other smart phone manufacturers e.g., Blackberry have
Πmm
launched their own operating systems. These developments add a
(
Πom )
new dimension of supply chain cooperation and competition in
the sector. Smart phone manufacturers, operating systems devel-
improve profitability further by better managing the channel,
subsidy, and price relative to competition. It is expected that the
results of our study will be used as a guideline to establish
adaptable channel selection and pricing policies for smart phone
supply chains in competitive marketplaces. Additionally, the
modeling approach we suggested can be applied not only to the
smart phone industry but also other technology and service
industries.
Similar to any other model previously published in the litera-
ture, the present model is also based on some assumptions. For
example, our model only considers the smart phone supply chain
that consists of one smart phone manufacturer and one telecom
service operator. While this supply chain setting simplifies the
modeling and provides some interesting insights, we have to
acknowledge that there is often fierce competition involving
multiple smart phone manufacturers and telecom service opera-
tors in more mature smart phone markets. This competition will
have a knock-on effect on channel selection decisions. One key
research direction is to consider a supply chain that consists of
multiple smart phone handset manufacturers and multiple tele-
com service operators. Second, a linear deterministic demand is
assumed in our model. One important extension of this work is to
include stochastic demand in the model. Furthermore, although
the impact of the telecom service price on supply chain decisions
and profitability are examined in the analytical and numerical
analyses, respectively, the service price (po ) is assumed to be fixed
in the model. One future extension is to analytically examine the
optimal service price in the case when the telecom service
operator selects the service price after the manufacturer and the
case where they act at the same time. Another future research
direction is to examine the impacts of the manufacturer's produc-
tion capacity and life expectancy of the goods and services on the
optimal pricing and channel selection strategies.
Acknowledgments
The authors would like to thank the anonymous referees and
the editor for their constructive comments on an earlier version of
the paper. The authors are supported by the Royal Society Inter-
national Exchanges cost share scheme (Ref. IE131228) with the
18 X. Chen, X. Wang / Omega 53 (2015) 11–20

National Natural Science Foundation of China (No. 71411130137). From (7), we obtain
The first author is also partially supported by the National Natural dπ bo ðρÞ 


Science Foundation of China (Nos. 71272128 and 71432003), dρ
¼
 α  β m þ cm ρ þ po þ β po  ρ  co ¼  α þ βðm þcm Þ


Program for New Century Excellent Talents in University (No. þ 2β po  ρ  βco ;
NCET-12-0087), Specialized Research Fund for the Doctoral Pro- 2
d π bo ðρÞ
gram of Higher Education (No. 20130185110006), and Youth ¼  2β o0;
dρ2
Foundation for Humanities and Social Sciences of Ministry of
Education of the People's Republic of China (No. 11YJC630022). so π bo ðρÞ is concave in ρ. Let ððdπ bo ðρÞÞ=dρÞ ¼ 0. We obtain


 α þβðm þ cm Þ þ 2β po  ρ  βco ¼ 0, that is, α þ βpm þ 2βpo  βρ
 βco ¼ 0. Then
α
Appendix A ρ ¼ 2po þ pm   co ðA3Þ
β

The Proof of Proposition 1. From (A2) and (A3), we obtain

From (1), we obtain
2α cm co cm 2co α
dπ fm ðpm Þ

 pvm ¼ þ þ  po and ρv ¼ po þ   :
dpm
¼ α  β pm þ po  β pm  c m ¼ α þ βcm  βpo  2βpm 3β 3 3 3 3 3β

and
2
 This completes the proof.
d π fm pm
¼  2β o 0;
dpm 2 The Proof of Proposition 4.

 From (7), we obtain
so, π fm pm is concave in pm . Let ððdπ fm ðpm ÞÞ=dpm Þ ¼ 0, we obtain



α þ βcm  βpo  2βpm ¼ 0, so pfm ¼ ðα=2βÞ þ ðcm =2Þ  ðpo =2Þ. This com- dπ bo ðρÞ
¼  α  β m þ cm ρ þ po þ β po  ρ  co ¼  α þ βðm þcm Þ
dρ
pletes the proof.

þ 2β po  ρ  βco ;
2
The Proof of Proposition 2. d π bo ðρÞ
¼  2β o0;
From (5), we obtain dρ2
dπ bm ðpm Þ

 so π bo ðρÞ is concave in ρ. Let ððdπ bo ðρÞÞ=dρÞ ¼ 0. We obtain  α þ
dp
¼ α  β pm þ po  β pm þ ρ cm ¼ α þ βcm  βpo  βρ  2βpm ;

m
βðm þ cm Þ þ2β po  ρ  βco ¼ 0, that is, α þ βpm þ 2βpo  βρ
2
  βco ¼ 0. Then
d π bm pm
¼  2β o 0 α
dpm 2 ρ ¼ 2po þ pm  co  ðA4Þ

 β
so, π bm pm is concave in pm . Let ððdπ bm ðpm ÞÞ=dpm Þ ¼ 0, we get Substituting (A4) into (5), we obtain
α þ βcm  βpo  βρ  2βpm ¼ 0, then 

 α 

α cm po ρ b
π m pm ¼ 2pm þ2po  co   cm α  β pm þ po :
pm ¼ þ   ðA1Þ β
2β 2 2 2
Then,

  
Substituting (A1) into (6), we obtain dπ bm ðpm Þ
dpm
¼ 2 α  β pm þ po  β 2pm þ 2po  co  αβ  cm ¼ 3α þ βcm
1

 þβco 4βpo  4βpm ;
π bo ðρÞ ¼ p  ρ  co α  β po þcm  ρ :
2 o 2

d π bm pm
Then, ¼  4β o 0;
dpm 2
dπ bo ðρÞ 1
 1



¼  α  β po þcm  ρ þ β po ρ  co so, π bm pm is concave in pm . Let ððdπ bm pm Þ=dpm Þ ¼ 0. We obtain
dρ 2 2 3α þ βcm þ βco  4βpo  4βpm ¼ 0, then pm ¼ ð3α=4βÞ þ ðcm =4Þ þðco =4Þ
m
2
α  β ðc m  c o Þ d π bo ðρÞ  po . Substitute pm
m into (A4). We obtain ρ ¼ po þ ðcm =4Þ  ð3co =4Þ
m
¼ βpo  βρ  ¼ β o 0
2 dρ2  ðα=4βÞ. This completes the proof.
so π bo ðρÞ is concave in ρ. Let ððdπ bo ðρÞÞ=dρÞ ¼ 0. We obtain βpo  The Proof of Proposition 5.
βρ  ððα βðcm  co ÞÞ=2Þ ¼ 0. Then, ρt ¼ po þðcm =2Þ  ðco =2Þ  ðα=2βÞ.

v
t 
From (8), (11) and (13), we obtain π
bm pm m 4 π m pm 4 π m pm .
b b
Substitute ρt into (A1). We obtain ptm ¼ ð3α=4βÞ þ ðcm =4Þ þ

πo ρ  4 π
o ðρ Þ 4 π o ðρ
Þ. From
b t b v b m
From (9), (12) and (15), we obtain 
ðco =4Þ  po . This completes the proof. (10), (13) and (16), we obtain π b pvm ; ρv 4π b ptm ; ρt ¼ π b pm m; ρ
m
.
This completes the proof.
The Proof of Proposition 3. From (5), we obtain
dπ bm ðpm Þ

 The Proof of Proposition 6.
dp
¼ α  β pm þ po  β pm þ ρ cm ¼ α þ βcm  βpo  βρ  2βpm ;
m

2
 (1) In a TS power structure, to let the smart phone manufacturer

d π bm pm accept the bundled channel, the manufacturer should get
¼  2β o 0;

dpm 2 more is, π bm ptm 4
 profit
 than that in a free channel, that


 π fm pfm . From (3) and (8), we obtain β ðα=4βÞ  ðcm =4Þ 
so, π bm pm is concave in pm . Let ððdπ bm ðpm ÞÞ=dpm Þ ¼ 0. We obtain
2
α þ βcm  βpo  βρ  2βpm ¼ 0, then ðco =4ÞÞ2 4 β ðα=2βÞ  ðcm =2Þ  ðpo =2Þ . From Proposition 1, we
f
obtain pm ¼ ðα=2βÞ þ ðcm =2Þ  ðpo =2Þ 4 cm , that is, β o ðα=po þ
cm Þ and ðα=2βÞ  ðcm =2Þ  ðpo =2Þ 4 0. Then, we obtain ðα=4βÞ 
α cm po ρ ðcm =4Þ  ðco =4Þ 4 ðα=2βÞ ðcm =2Þ  ðpo =2Þ, that is, β 4 ðα=2po þ
pm ¼ þ   ðA2Þ
2β 2 2 2 cm  co Þ. From Proposition 2, we obtain ptm ¼ ð3α=4βÞ þ ðcm =4Þ þ
 X. Chen, X. Wang / Omega 53 (2015) 11–20 19

ðco =4Þ  po 4 cm , that is, that is,

α α
βo : βo :
ð4=3Þpo þ cm  ð1=3Þco 3po þ cm  2co
Hence
α α
oβ o : So, in a VN power structure, the smart phone supply chain will
2po þ cm  co ð4=3Þpo þcm  ð1=3Þco
select a free channel.
(3) In a MS power structure, to let the smart phone manufacturer
From (4) and (9), we obtain accept the bundled channel, the manufacturer should

    2
 α cm po 
get
π bo ρt  π fo pfm ¼ 2β 4β
α
 c4m  c4o β po  co 2β 22 more profit
 than that in a free channel, that is π bm pm
m 4

 2 π fm pfm . From (3) and (14), we obtain

α c m c o po  
¼ 2β  þ  4 0; α cm co 2 α c m po 2
4β 4 4 2 2β   4β   :
4β 4 4 2β 2 2
then the telecom service operator will accept the bundled
channel in the TS power structure. From Proposition 1, we get
So, in a TS power structure, if α cm p
α α p fm ¼ þ  o 4 cm ;
oβ o

 ; 2β 2 2
2po þ cm  co 4=3 po þ cm  1=3 co
that is,
then the smart phone supply chain will select a bundled α cm po
channel; if 0 oβ r ðα=ð2po þ cm  co ÞÞ, then the smart phone   4 0:
2β 2 2
supply chain will select a free channel.
Then, we obtain
(2) In a VN power structure, to let the smart phone manufacturer
pffiffiffi α cm co  α cm po
accept the bundled channel, the manufacturer should  get more 2   4  

v
profit than that in a free channel, that is π b
p 4 π f
p f 4β 4 4 2β 2 2

m m 2
m m
. From
(3) and (11), we obtain β ðα=3βÞ  ðcm =3Þ  ðco =3Þ 4 β ðα=2βÞ that is,
 ðcm =2Þ ðpo =2ÞÞ2 . From Proposition 1, we obtain pfm ¼ ðα=2βÞ þ α
ðcm =2Þ  ðpo =2Þ 4 cm , that is, ðα=2βÞ  ðcm =2Þ  ðpo =2Þ 4 0. Then, β4 pffiffiffi  pffiffiffi :
2 þ 2 po þ c m þ 1 þ 2 c o
we obtain ðα=3βÞ  ðcm =3Þ  ðco =3Þ 4 ðα=2βÞ  ðcm =2Þ  ðpo =2Þ,
that is, β 4 α=ð3po þ cm 2co Þ:
To let the telecom service operator accept the bundled channel in a
VN power structure, she should  get more profit than that in a free To let the telecom service operator accept the bundled channel
channel, that is π bo ðρv Þ 4 π fo pfm . From (4) and (12), we obtain
in a MS power structure, the telecom service operator should get
   
α cm co 2
 α c m po more profit than that in a free channel, that is π bo ðρm Þ 4 π fo pfm .
β   4 β po  c o   ;
3β 3 3 2β 2 2
From (4) and (12), we obtain
 2 
that is, α cm co
 α c m po
β   4 β po  c o   ;
  4β 4 4 2β 2 2
α cm co 2
 α c m po
   po  co  
3β 3 3 2β 2 2 that is,
 2   2
 α cm po 
α cm co
 α c m co β 4βα
 c4m  c4o  β po  co 2β 22
¼    po  c o  
3β 3 3 2β 2 2  2  α c 

9
2 po co 2 α cm co

2
þ p  co  6 ¼β 4β  4  4  po  co 2β  2m  c2o þ po  co
16 o
4 
 
2 #
α cm co 3 po  co p co α cm co po  c o
¼    þ o  
3β 3 3 4 4 3β 3 3 

  2
3 po  c o p  co "
  o 2  #
4 4 α cm 3 po  c o 2
  ¼β  þ co po  pffiffiffi
α c m po c o α cm 2 4β 4 4 2
¼   þ   po þ co 4 0:  
3β 3 2 6 3β 3 3 α cm 3 po co α cm 3 p  co
¼β  þ co  po þ pffiffiffi  þ co  po  opffiffiffi 4 0:
4β 4 4 2 4β 4 4 2
From Proposition 3, we obtain
2α cm co From Proposition 4, we obtain
pvm ¼ þ þ  po 4 c m ;
3β 3 3
3α cm co
pm
m¼ þ þ  po 4 c m
4β 4 4
that is,
that is,
α c m po c o β 4
  þ 4 0: α  βcm þ co  βpo 4 0;
3β 3 2 6 3 3
Then, so
" pffiffiffi #
α cm 2 α cm 3 p  co 1 β 4 6 28

  po þ c o 4 0  þ co po þ opffiffiffi ¼ α βcm þ co  βpo þ β po  co 4 0:
3β 3 3 4β 4 4 2 4β 3 3 3
20 X. Chen, X. Wang / Omega 53 (2015) 11–20
Then, we obtain
α cm 3 p  co
 þ co  po  opffiffiffi 4 0;
4β 4 4 2 effects of price promotions. Marketing Science 2013;32(1):127–52.
that is,
α 2001;135(3):527–44.
βo  pffiffiffi  pffiffiffi :
2 2 þ 2 po þ cm  3 þ2 2 co
So, in a MS power structure, if
α α
 pffiffiffi  pffiffiffi oβ o  pffiffiffi  pffiffiffi ;
2 þ 2 po þ cm þ 1 þ 2 co 2 2 þ 2 po þ cm  3 þ 2 2 co
then the smart
 phone
pffiffiffi supply chain
 will
pffiffiffi select a bundled channel;
if 0 oβ r ðα= 2 þ 2 po þ cm þ 1 þ 2 co Þ, then the smart phone
supply chain will select a free channel. This completes the proof.
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