A Responsive-Pricing Retailer Sourcing from Competing Suppliers Facing Disruptions

Problem definition: We study a problem of a retailer who orders from two competing strategic suppliers subject to independent or correlated disruptions and responds by setting the retail price upon delivery, which we call responsive pricing. The suppliers compete by setting their wholesale prices. Academic/Practical Relevance: Supplier disruption correlation exists for reasons such asproduct and service designs, geographic proximity, and common tier 2 suppliers. In practice, manyretailers are able to set the product price after knowing the delivered quantity. Methodology: We model this problem as a Stackelberg-Nash game with the suppliers as theleaders and the retailer as the follower, and obtain its equilibrium explicitly. We perform sensitivityanalyses with respect to suppliers' production costs, reliabilities, and their correlation.Results: We find surprisingly that an increase in the reliability of a supplier may, counter toour intuition, hurt him due to the competition between the suppliers selling to a responsive-pricingretailer. Furthermore, in contrast to the literature, we find that under responsive pricing, a highdisruption correlation may benefit a supplier who has a cost advantage, and the total order quantitymay increase in that correlation due to supplier competition.Managerial Implications: This paper has important implications for unreliable suppliersbecause the way reliability and correlation influence their profits depends on the retailer's pricingpower and the competition intensity between the suppliers. With a responsive-pricing retailer, asupplier may not benefit from a higher reliability but may benefit from a higher correlation. Thisexplains why a supplier with a cost advantage may have an incentive to create a positively correlated supply network by building plants in the geographic location of his competitor, or sourcing from the same tier 2 supplier to obtain a higher correlation strategically.