On the benefits of assortment-based cooperation among independent producers

Abstract

Motivated by the challenges small- to medium-size companies face in export-oriented industries, we consider a competitive market for a set of substitutable products. Depending on the assortment of the firms and the substitution behavior of the customer, either a product is sold to the customer or the sale is lost. We consider the cooperation of independent producers that offer a combined set of products to their customers. Producers use discounted price contracts to manage the exchange of products among themselves. We propose an analytical model that enables us to determine the characteristics of firms and their products that would facilitate a beneficial cooperation. We conclude that a cooperation between symmetric single-product firms is always beneficial, whereas threshold-type criteria should be satisfied so that assortment-based cooperation is beneficial for asymmetric firms. We also show that commonality in product assortments of cooperating firms has adverse effects on the benefit from cooperation. For the most general problem setting, we propose a method to determine the set of firms that should cooperate and set the parameters of the contract among the members of cooperation in such a way that each member of the cooperation is better off. We use a numerical study to draw insights on the conditions for which our cooperation scheme is beneficial in the most general problem setting.