Manufacturer-Retailer Supply Chain Cooperation Through Franchising: A Chance Constrained Game Approach

Abstract

In the literature of manufacturer-retailer supply chains, the focus of research is on a relationship in which a manufacturer is the leader and retailers are followers. This relationship implies a dominance of the manufacturer over retailers. Recent studies in marketing have shown a shift of retailing power from manufacturers to retailers. Retailers have equal or even greater power than a manufacturer when it comes to retailing. Based on this new market phenomenon, we intend to investigate a special manufacturer-retailer supply chain, i.e., the franchisor-franchisee supply chain. Utilizing chance constrained game theory, we explore the role of franchising efficiency with respect to transactions between a franchisor and a franchisee through fixed lump-sum fees, royalties, wholesale prices and retail prices. Two franchising game models are discussed. In a leader-follower non-cooperative game, the franchisor is assumed to be a leader who first specifies the fixed lump-sum fee, the royalty payment, and the wholesale price. The retailer, as a follower, then decides on the retail price. We then relax the assumption of the retailer’s inability to influence the manufacturer’s decisions and discuss a cooperative and partnership situation between the franchisor and the franchisee. The Nash (1950) bargaining model is utilized to implement profit sharing for the franchisor and the franchisee to achieve their cooperation.