Investment Strategy in a Supply Chain Featuring an Entrant Supplier

This paper studies strategic supply chain interactions when a retailer invests in reducing an incumbent supplier’s production cost and may introduce a competing supplier. Analyzing scenarios with and without investment spillovers yields three insights: (1) supplier entry can boost retailer investment; (2) contrary to conventional wisdom, when production cost and competitive pressure are high, an entrant supplier can uniquely benefit the incumbent supplier; (3) a novel revenue and cost-sharing contract can serve as a strategic tool for the incumbent supplier to deter entry. Numerical analysis confirms the robustness of these results under partial spillovers.