Endogenous Commitments: Implications for Supply Chains

Abstract Problem Definition: While a centralized firm selling durable products benefits from committing to future prices, it remains unclear whether this conclusion extends to a decentralized supply chain where a manufacturer distributes durable products through a retailer. Further, previous research on commitments in decentralized supply chains is sparse and assumes exogenous commitments. To address this gap, we examine the implications of commitment decisions in a supply chain where a manufacturer and a retailer endogenously decide whether to commit to future wholesale and retail prices, respectively. Methodology and Results: Using a two-period game-theoretic model, we show that, in equilibrium, either both firms commit to future prices or neither does, indicating that commitment by only one of the firms is not a stable equilibrium. Unlike a centralized firm, both the manufacturer and the retailer in our model may paradoxically suffer due to their commitment capabilities. Additionally, compared to exogenous commitments, endogenously chosen non-commitments can harm the retailer and the supply chain. Interestingly, supply chain coordination can be either better or worse under endogenously determined non-commitment equilibria compared to exogenous commitments. Furthermore, an increase in strategic consumer behavior initially improves but eventually undermines supply chain coordination. Our key insights on commitment strategies, firm profits, and supply chain coordination remain robust to inventory carryover by the retailer. Managerial Implications: Our findings suggest that firms must recognize the interdependent nature of commitment decisions and consider how their choices affect – and are affected by – those of their supply chain partners. Moreover, firms should carefully assess the impact of strategic consumer behavior and their impatience for future profits when making commitment decisions. Overall, our study demonstrates that the insights derived from commitment strategies of centralized firms or exogenously given commitments in decentralized supply chains do not necessarily apply to decentralized supply chains with endogenous commitment decisions.