Maintaining Vertical Relationship in the Presence of Upstream Supplier's Forward Shareholding : Backward Shareholding or Supplier Development?

Backward shareholding and supplier development are commonly observed strategies to maintain vertical relationship for downstream buyers. This paper investigates the downstream buyer's relationship management strategy choice in the presence of upstream supplier's forward shareholding. We consider a two-tier supply chain wherein the supplier provides components to a downstream buyer who processes and resells them in the product market. Our analytical results indicate that the cost reduction strategy and backward shareholding strategy are strategic substitutes, which are independent of the investment efficiency and shareholding level. There exists an investment efficiency threshold, below which the retailer chooses the cost reduction strategy only and above which the retailer's optimal strategy is the combination of cost reduction strategy and backward shareholding. Furthermore, the shareholding strategy always hurts the supplier and the whole supply chain while the cost reduction strategy always benefits the supplier and the supply chain. Finally, all supply chain members prefer the cost reduction strategy when the cost reduction investment is more efficient