Abstract

This paper discusses a scenario that two upstream manufacturers are assumed to compete for the order simultaneously on price and quality or they may agree to cooperate on quality and simply compete on price. In addition, we assume that the investment of manufacturers on quality improvement in the first period can generate benefit to lower manufacturers' production costs in the second period. Results show that competitive manufacturers(or cooperative manufacturers) may have an incentive to improve their quality cost or quality synergy only when the effect of quality benefit is large enough. Secondly, results show that the margin of competitive manufacturers is always less than the retailer's, but the margin of cooperative manufacturers will be improved to be the same as the retailer's. The managerial implication is that two manufactures facing a single retailer should cooperate with each other to reach a win-win situation, especially when the epoch of micro-profit is coming.