The Manufacturer’s Role in Nanostore-Supermarket Supply Chain Competition

Abstract

We explore retail supply chains in emerging markets in which a manufacturer can reach consumers by selling its product through very small independent stores (nanostores) and/or through a supermarket. Nanostores offer consumers the advantage of proximity, but supermarkets offer the advantage of bulk buying. We explore the competition between the supermarket and nanostores and examine the manufacturer’s role in shaping the retail market structure for its product through wholesale price contracts. We model and analyze a multi-party supply-chain game in which a manufacturer can sell its product to spatially distributed, utility-maximizing, price-sensitive consumers through nanostores and a supermarket. Consumers can buy in bulk at the supermarket, optimizing their purchase quantity, and hence visit frequency, in an economic order quantity type approach, or they can purchase from a nanostore (frequently due to store storage-space limitations). We fully solve for the equilibrium market structure and the associated retail and wholesale prices, establishing that the manufacturer’s desired channel strategy is governed by three factors: the manufacturer-nanostore supply chain cost, the manufacturer-supermarket supply chain cost, and the supermarket bargaining power. If the supply chain efficiencies are somewhat similar, then the manufacturer should (typically, but not always) use both retail formats to avail of the nanostore advantage in serving proximate consumers and the supermarket advantage in serving distant customers. The specifics of how the manufacturer should use the retail formats will depend on the supermarket power. Among other results, we establish that aggregate nanostore demand and profit can decrease in nanostore density and that the presence of a high-power supermarket can increase consumer surplus because the manufacturer induces strong price competition.