Optimal Strategies for A Dual-Channel Farming Supply Chain with Horizontal Competition and Cooperation

In this paper, we consider a dual-channel farming supply chain with two farmers and one distributor, where agriculture products produced by farmers have different quality levels. Farmers sell high-quality products to supermarkets and normal-quality products to small retail markets, respectively. Three scenarios are investigated: decentralized selling through the distributor to supermarkets (the DD mode); centralized selling through the distributor to supermarkets (the CD mode); centralized selling directly to supermarkets (the CS mode). Under the CS mode, farmers need to bear some extra sale cost such as inventory and transportation cost. We derive farmers’ optimal strategies of production effort and quality investment. It turns out that as farming scale expands, farmers’ production effort decreases, while quality investment increases. Moreover, two farmers’ quality investments are the highest under the CS mode and the least under the DD mode. Further analysis indicates that farmers’ total profits are generally the highest under the CS mode, but farmers obtain the highest profits under the CD mode if farmers’ extra sale cost under the CS mode exceeds a certain level. Therefore, to improve farmers’ welfare and agriculture products’ quality simultaneously, the CS mode may be the best choice in most cases, and it leads to a “win–win” situation for farmers and consumers.