Procurement strategies of retailers under competition with volatile component prices

The prices of raw materials used in manufacturing often exhibit fluctuations over time. This paper investigates how competitive duopolistic retailers, operating within a context of volatile raw material costs, make strategic procurement decisions. These decisions encompass not only ordering quantities and selling prices but also the timing of orders, particularly when confronted with a demand sensitive to price changes. I propose three distinct competitive behaviors among retailers: Cournot, Collusion, and Stackelberg. Furthermore, I conduct a comparative analysis of the procurement strategies adopted by duopolistic retailers under these competitive scenarios. The findings reveal that retailers’ ordering policies are significantly influenced by specific thresholds which are determined by both the prevailing time and input prices. Notably, as the degree of substitutability between retailers escalates, the corresponding thresholds widens. This phenomenon suggests that heightened competition between retailers enables both parties to endure higher input prices. Moreover, a retailer with bigger market demand can always endure a higher input price when the input price has an upward trend regardless the types of the duopolistic retailers’ competitive behaviors (Cournot and Stackelberg). To provide further insights, I supplement the analysis with numerical experiments.