Managing Supply Disruption by Horizontal Cooperation

In this paper, we study how and when competing firms cooperate horizontally to manage supply disruption risks. Specifically, we consider a system consisting of two competing retailers that sell the same product in a market where the price depends on the total quantity of products on hand. Each retailer has its own supply disruption probability. In terms of complete information, we show that they should cooperate to manage supply disruption risk and design a cooperation mechanism using cooperative bargaining. Furthermore we study the cooperation problem in the case of private information. We model the problem as a dynamic bargaining model in which the informed retailer's supply disruptions are either high or low. In the dynamic negotiation process, the informed retailer can signal information through their offers. With the uninformed retailer's acceptance criteria, we characterize the perfect Bayesian equilibrium of the bargaining game. We show that the uninformed retailer may reach an agreement with either the high type or the low type first, or with both simultaneously. We find that retailer's surplus with private information may be higher than that with complete information.