Equilibrium contract selection strategy in chain-to-chain competition with demand uncertainty

This paper investigates the equilibrium contract selection problem for the dominant suppliers in two competing supply chains with stochastic and price‐sensitive demand. The two suppliers, acting as the Stackelberg leaders, produce substitutable products and distribute them through each exclusive retailer, and can provide either a consignment contract or a wholesale‐price contract. The equilibrium behaviours of the suppliers and retailers are investigated in three different scenarios: (1) the consignment contract scenario; (2) the wholesale‐price contract scenario; and (3) the hybrid contract scenario. We prove that the equilibrium contracting strategy is of the threshold type: when the cost‐share rates of the two retailers are above certain thresholds, both suppliers select consignment contracts; when the cost‐share rates of the two retailers are lower than certain thresholds, both suppliers select wholesale‐price contracts; when one retailer’s cost‐share rate is above a certain threshold and the other is lower than a certain threshold, the supplier with large retailer’s cost‐share rate selects the consignment contract and the other supplier with small retailer’s cost‐share rate selects the wholesale‐price contract. Furthermore, these thresholds depend on price sensitivities.