Negotiated Wholesale Prices in Competing Supply Chains

This study examines how bargaining protocols for wholesale-price negotiations shape equilibrium outcomes in competing manufacturer–retailer pairs and how these protocols map onto observed margins. We develop a duopoly model with two manufacturer–retailer pairs offering differentiated products. In each pair, the manufacturer and retailer negotiate a unit wholesale price, after which retailers compete in retail prices. We compare two bargaining protocols: (i) generalized Nash bargaining, which determines the wholesale price by maximizing the Nash product of the parties' gains over their disagreement payoffs; and (ii) a generalized Kalai–Smorodinsky (negotiated-aspiration) protocol, which equalizes proportional shortfalls from utopia payoffs while allowing for asymmetric bargaining power. We characterize the equilibrium wholesale and retail prices and profits under each protocol. In a bilateral-monopoly benchmark, the negotiated-aspiration protocol mitigates double marginalization and increases total channel profit relative to generalized Nash bargaining, although manufacturers prefer generalized Nash bargaining because it yields higher wholesale prices. With two competing manufacturer–retailer pairs, however, the profit rankings for retailers and for the channel as a whole depend on both the distribution of bargaining power and the intensity of downstream competition, because higher wholesale prices can soften downstream price competition. When the bargaining protocol is endogenized, supply chains may use it as an observable commitment device, leading to either symmetric or asymmetric protocol choices in equilibrium.