The research on coordination of cigarette supply chain with substitute cigarette products

In China, tobacco is a state-run monopoly and facing more fierece competition after entry to WTO. In the paper, a model of cigarette supply chain which is composed of the Tobacco Monopoly Administration and one cigarette retailer is considered. The Tobacco Monopoly Administration acts as the leader. There are two kinds of substitute cigarette products sold in the market. The two kinds of cigarette products have different price elasticity of demand. The optimal order quantity of each cigarette product of the cigarette supply chain with wholesale price-only contract in the decentralized case by the retailer is half that of the cigarette supply chain in the centralized case. Also, the optimal unit retail price of each cigarette product in the decentralized case is higher than that in the centralized case. The total profit of the cigarette supply chain with wholesale price only contract in the decentralized case is less than half of the optimal profit in the centralized case. To achieve the optimal profit of the centralized cigarette supply chain in the decentralized case, a two-part tariff contract is proposed to coordinate the cigarette supply chain. The results are helpful to enhance the competibility of the cigarette supply chain in China.