Competing with Bandit Supply Chains

27 Pages Posted: 21 Sep 2012

See all articles by Meng Li

Meng Li

University of Houston - Department of Decision & Information Sciences

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Jun Zhang

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: September 12, 2012

Abstract

Bandit products have captured significant market shares in China and have started to expand throughout the world. A striking feature of supply chains for bandit products is decentralization, where the upstream firm determines the product quality and the downstream firms compete on prices. We study competition between a centralized mainstream firm and a decentralized bandit supply chain. We demonstrate that the structural difference between the mainstream firm and the bandit supply chain reduces competition intensity and the quality difference between their products. Furthermore, due to the free-riding effect, the bandit supply chain may even offer higher quality products than the mainstream firm. The mainstream firm’s profit as a function of the free-riding effect is U-shaped, so that free-riding by the bandit supply chain may eventually benefit the mainstream firm. Finally, decentralization benefits the bandit supply chain when the competition is on product features.

Keywords: bandit, competition, price, quality, feature, supply chain

JEL Classification: C61, L11, L15

Suggested Citation

Li, Meng and Sethi, Suresh and Zhang, Jun, Competing with Bandit Supply Chains (September 12, 2012). Available at SSRN: https://ssrn.com/abstract=2149740 or http://dx.doi.org/10.2139/ssrn.2149740

Meng Li

University of Houston - Department of Decision & Information Sciences ( email )

United States

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

Jun Zhang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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