Alliance formation in a coproduct supply chain

Abstract

This paper investigates how heterogeneous retailers in a coproduct supply chain strategically form procurement alliances to manage trade‐offs between bargaining power and mismatch risk, as the market volatility escalates the mismatch ratio. The coproduct alliance formation (CAF) problem warrants further investigation because coproducts are generated through simultaneous production, yielding outputs from a common resource (e.g., cattle, petroleum) that provides complementary components for distinct markets. We introduce a stylized model to analyze decentralized procurement (mode DP) versus centralized procurement (mode CP) under processing cost and market volatility in the CAF. We show that (i) mode CP dominates mode DP when processing costs are high, and market volatility is low, or when costs are low, but market volatility is high, as pooling orders mitigates supply–demand mismatches and strengthens bargaining leverage against upstream suppliers; (ii) a stable core of the grand coalition emerges, enabling profit‐sharing mechanisms that align incentives among heterogeneous partners. Furthermore, by extending to multi‐retailer settings and general cost structures into the CAF, we demonstrate that mode CP reduces risks while optimizing cost efficiencies. We propose a proportional profit‐sharing scheme as a practical alternative to computationally intensive Shapley values and core imputations. This paper generates some insights into supply chain collaboration on the CAF that firms should prioritize mode CP. These effects are magnified if the processing cost and market volatility are high or low, thus the alliance can adopt feasible profit‐sharing schemes to minimize mismatch risks and leverage proportional allocation rules to sustain long‐term alliances.