Vertical integration in competing supply chains under additive stochastic demand

This article addresses the decision of integration/decentralisation from manufacturers’ perspective in competing supply chains under demand uncertainty. Two manufacturers are considered. Each manufacturer produces a substitutable product and sells it through either a decentralised or an integrated retail store, modelled as a price-setting newsvendor. An additive stochastic demand function is employed to characterise demand and its uncertainty. Results indicate that the impact of demand uncertainty on integration/decentralisation is complicated since it may favour either integration or decentralisation, depending on how demand uncertainty is characterised. Another important finding is that increase in horizontal competition does not necessarily hurt manufacturers and/or retailers.