The choice of vertical control structure under chain-to-chain quantity competition and diseconomies of scale

We develop a chain-to-chain model which is defined by two manufacturers and two exclusive retailers under quantity competition and diseconomies of scale. We investigate the impact of quantity competition and scale diseconomies on the choice of vertical control structure from the aspects of manufacturer's performance and the supply chain's performance. The results show that: from the standpoint of manufacturer's performance, centralized structure is a dominant equilibrium that is not affected by the quantity competition and diseconomies of scale. From the attitude of the supply chain's performance, centralized structure is a dominant strategy when quantity competition between the two competitive supply chains is weak, or moderate, or relatively fierce and manufacturer's scale diseconomies is relatively strong; but centralized structure will be a prisoner dilemma when the quantity competition is relatively fierce and diseconomies of scale is relatively weak, or quantity competition is heavily fierce. What we examine expands the results of McGuire(1983) and will contribute to the academic support on the choice of vertical control structure under chain-to-chain competition.