NAVIGATING THE VIRTUAL PRODUCT
SUPPLY CHAIN
The Dynamics of Supplier-Distributor Collaboration Based on research by Chao Meng and his team
The virtual product market has been growing in the past decade, and we have seen the trend of books and games being distributed digitally. For example, Apple’s ecosystem facilitated $643 billion in billings and sales during 2020. Like other physical products, virtual products rely on its supply chain in production and distribution. For example, e-books are published by publishers and distributed by distributors like Amazon. In addition, mobile applications and games are developed by developers and distributed by distributors like app stores. Therefore, the collaboration between the product supplier and the distributor is the key to the success of the product. Because of the position in the supply chain, the distributor is usually in an advantageous position compared to other channel members. That is because most of the distributors are large online platforms that have well-established customer groups. For example, Tencent Games, which has the largest online game platform in China, distributes and hosts multiple online games in China. Most independent game developers sell their games through Tencent Games’ platform according to Tencent Games’ terms (e.g., revenue share) and become the follower in the supply chain. Selling products through large distributors like Tencent Games ensures adequate market access and visibility for independent developers. However, some game developers may not enter that type of collaboration because of its negotiation power and existing brand awareness. For example, the online game Call of Duty is produced by American Company Activision Blizzard, one of the largest game companies in America and Europe. In China's market, the game is hosted and operated by Tencent Games. Due to the established player population and brand awareness of the game, Activision Blizzard and Tencent Games have similar negotiation power. For supply chains, the importance of information sharing has been recognized and studied by literature in the past decade. Supply chain practice has shown that upstream firms can use shared data to derive demand information for its decision
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making. Research shows that downstream retailers can share their data with their upstream partners to achieve a better supply chain collaboration. However, more than 40% of them charge their partners for the data. In a virtual product supply chain, due to the advantageous position in the distribution channel, distributors normally have access to a large amount of end user data, such as usage data and product reviews. In this research, Dr. Meng and his co-authors derive the optimal virtual product pricing and quality effort decisions in both Nash game and Stackelberg game. By analyzing the supplier’s and distributor’s optimal decisions, they find that only the distributor's markup decision is independent of the cost of quality effort. The research shows that information sharing mitigates double marginalization in both Nash game and Stackelberg game. The research finds that when the quality economy is large, the supplier’s quality effort is higher in the Stackelberg game than in the Nash game, regardless of the information sharing decision. The effect of double marginalization on the product price is only affected by the market characteristics instead of supply chain game structure. The results show that the distributor only shares information for free with a large quality economy. However, the information sharing decision only depends on market characteristics instead of supply chain game structure. TO READ THE FULL RESEARCH ARTICLE, SEE: Meng, C., Qu, J., Hu, B. (2022) Pricing and quality decisions in virtual product supply chains with information sharing. Journal of the Operational Research Society.
CHAO MENG is an assistant professor of marketing at The University of Southern Mississippi.