Two-echelon supply chain operations under dual channels with differentiated productivities

This paper examines a two-echelon supply chain with an upstream supplier (she) and a downstream manufacturer (he) transacting an intermediate product via direct bilateral contracting and futures market channels with differentiated productivities. A game model is established to examine the dual-channel supply chain operations. Analytical results reveal that downstream productivity improvement (DPI) through the bilateral interaction is necessary and sufficient for the supply chain members to trade in the bilateral channel in addition to the futures market. We show that when the price in the futures market increases, the manufacturer would purchase less from the futures market and more from the supplier, which not only increases the supplier's expected profit but also increases her risk (variance of the profit) in equilibrium. Furthermore, when the bilateral channel exhibits stronger DPI, the manufacturer obtains a higher expected profit and bears a higher risk, but the supplier enjoys a higher expected profit without incurring any additional risk.