Equilibrium supply chain structures in the presence of asymmetric manufacturer capabilities in service efficacy and provision

In 2012, Tesla Motors announced that it would pursue company owned stores, while major automobile manufacturers, such as Ford and Honda, employ the traditional dealership model. Adding ‘service’ to the McGuire-Staelin duopoly game as another competitive instrument to ‘price’, this paper studies the role of service in shaping an equilibrium supply chain structure to show if and when a mixed supply chain structure of one integrated supply chain and one decentralized supply chain becomes an equilibrium outcome. Our model incorporates asymmetric manufacturer capabilities in service efficacy and provision, where service efficacy refers to the effectiveness of generating a higher demand for a given service level and service provision the cost-efficiency in producing service. Our results show that a mixed supply chain structure emerges as a Nash equilibrium outcome only if two products are moderately substitutable and one manufacturer is superior to the other in service provision with the former downward integrating and the latter decentralizing. Under this scenario, the superior manufacturer raises its profits by investing in service provision capabilities, widening the gap with its opponent, and furthermore, the superior manufacturer compensates for a less differentiated product if it is capable of providing service far more cheaply than its opponent.