Manufacturer-Optimal Wholesale Pricing When Retailers Compete (original) (raw)
Related papers
Production and …, 2006
In this paper, we analyze a scenario where a manufacturer with a traditional channel partner (i.e., a retailer) opens up a direct Internet channel that is in competition with the traditional channel partner. We first consider that in order to mitigate channel conflict the manufacturer, who chooses wholesale prices as a Stackelberg leader, commits to setting a direct channel retail price that matches the retailer's price in the traditional channel. Under this general equal-pricing strategy, we determine the effect of more specific pricing strategies on prices and profits of the manufacturer and the retailer. These specific strategies are: (1) keep wholesale prices as they were before, (2) keep retail prices as they were before, or (3) select wholesale and retail prices that optimize profits for the manufacturer. Within these strategies we identify and summarize cases when the resulting prices are lower than the pre-Internet prices, and when they are higher, relating them to the respective channel costs and to the relative convenience to the consumer of the Internet channel. We find that Strategy 3-the specific equal-pricing strategy that optimizes profits for the manufacturer-often is also preferred by the retailer and customers (through lower prices) over the other equal-pricing strategies. We next consider the implications of the equal-pricing constraint through a numerical experiment that indicates that the equal-pricing strategy is appropriate as long as the Internet channel is significantly less convenient than the traditional channel. If the Internet channel is of comparable convenience to the traditional channel, then the manufacturer has tremendous incentive to abandon the equal-pricing policy-at great peril to the traditional retailer.
In this paper, we analyze a scenario where a manufacturer with a traditional channel partner (i.e., a retailer) opens up a direct Internet channel that is in competition with the traditional channel partner. We first consider that in order to mitigate channel conflict the manufacturer, who chooses wholesale prices as a Stackelberg leader, commits to setting a direct channel retail price that matches the retailer's price in the traditional channel. Under this general equal-pricing strategy, we determine the effect of more specific pricing strategies on prices and profits of the manufacturer and the retailer. These specific strategies are: (1) keep wholesale prices as they were before, (2) keep retail prices as they were before, or (3) select wholesale and retail prices that optimize profits for the manufacturer. Within these strategies we identify and summarize cases when the resulting prices are lower than the pre-Internet prices, and when they are higher, relating them to the respective channel costs and to the relative convenience to the consumer of the Internet channel. We find that Strategy 3-the specific equal-pricing strategy that optimizes profits for the manufacturer-often is also preferred by the retailer and customers (through lower prices) over the other equal-pricing strategies. We next consider the implications of the equal-pricing constraint through a numerical experiment that indicates that the equal-pricing strategy is appropriate as long as the Internet channel is significantly less convenient than the traditional channel. If the Internet channel is of comparable convenience to the traditional channel, then the manufacturer has tremendous incentive to abandon the equal-pricing policy-at great peril to the traditional retailer.
Coordination and manufacturer profit maximization: The multiple retailer channel
Journal of Retailing, 1995
This paper explores wholesale pricing behavior within a two-level vertical channel consisting of a manufacturer selling through multiple independent retailers. The introduction of multiple retailers is important for several reasons. These include: (I) the determination of optimal channel breadth: (2) an analysis of the optimality of channel coordination for all channel members; and (3) the determination of the distribution of each dyad's profits between manufacturer and retailer. The authors demonstrate the existence of a two-part tariff wholesale pricing policy, common to all retailers, that fully coordinates the channel. They then show that the manufacturer can generally obtain greater pro@ by setting a unique two-part tariff pricing-policy that does not coordinate the channel. Finally, the authors show that the fured-fee component of either two-part tariff determines channel breadth, that is, the number of profit-maximizing independent retailers that are willing to participate in the channel.
Asymmetric Wholesale Pricing: Theory and Evidence
Marketing Science, 2005
Asymmetric pricing is the phenomenon where prices rise more readily than they fall. We articulate, and provide empirical support for, a theory of asymmetric pricing in wholesale prices. In particular, we show how wholesale prices may be asymmetric in the small but symmetric in the large, when retailers face costs of price adjustments. Such retailers will not adjust prices for small changes in their costs. Upstream manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes. The implication is asymmetric -small wholesale increases are more profitable because manufacturers will not lose customers from higher retail prices; yet, small wholesale decreases are less profitable, because these will not create lower retail prices, hence no extra revenue from greater sales. For larger changes, this asymmetry at wholesale vanishes as the costs of changing prices are compensated by increases in retailers' revenue that result from correspondingly large retail price changes. We first present a formal economic model of a channel with forward looking retailers facing costs of price adjustment to derive the testable propositions. Next, we test these on manufacturer prices in a supermarket scanner dataset to find support for our theory. We discuss the contributions of the results for the asymmetric pricing, distribution channels and cost of price adjustment literatures, and implications for public policy.
Advertising and price competition in a manufacturer-retailer channel
ELSEVIER, 2017
We investigate how manufacturers' advertising competition, when advertising has a dynamic impact on the goodwill that affects market demand, interacts with the price competition in a manufacturer-retailer channel. Specifically, we examine the strategic choices made by manufacturers, the role of the retailer in exacerbating or mitigating competition among manufacturers, the total channel profit and how that is split among the different players. Using prices, sales, and advertising data in the laundry detergent category we find that advertising and pricing are strategic complements as manufacturer advertising increases the price elasticity of demand; advertising competition intensifies price competition but it also improves the profitability of manufacturers; the presence of retailers in the channel leads to increased advertising spending while mitigating the extent of price competition. Manufacturers can enjoy a higher profit from using retailers when they compete in both price and advertising. Finally, we show that the emergence of ecommerce, which enables manufacturers directly selling to end consumers, has asymmetric profit impacts on manufacturers, as brands with lower cost and lower brand goodwill are more benefited from ecommerce.
“Call for Prices”: Strategic Implications of Raising Consumers' Costs
Marketing Science, 2010
M any consumer durable retailers often do not advertise their prices and instead ask consumers to call them for prices. It is easy to see that this practice increases the consumers' cost of learning the prices of products they are considering, yet firms commonly use such practices. Not advertising prices may reduce the firm's advertising costs, but the strategic effects of doing so are not clear. Our objective is to examine the strategic effects of this practice. In particular, how does making price discovery more difficult for consumers affect competing retailers' price, service decisions, and profits? We develop a model in which a manufacturer sells its product through a high-service retailer and a lowservice retailer. Consumers can purchase the retail service at the high-end retailer and purchase the product at the competing low-end retailer. Therefore, the high-end retailer faces a free-riding problem. A retailer first chooses its optimal service levels. Then, it chooses its optimal price levels. Finally, a retailer decides whether to advertise its prices. The model results in four structures: (1) both retailers advertise prices, (2) only the low-service retailer advertises price, (3) only the high-service retailer advertises price, and (4) neither retailer advertises price. We find that when a retailer does not advertise its price and makes price discovery more difficult for consumers, the competition between the retailers is less intense. However, the retailer is forced to charge a lower price. In addition, if the competing retailer does advertise its prices, then the competing retailer enjoys higher profit margins. We identify conditions under which each of the above four structures is an equilibrium and show that a low-service retailer not advertising its price is a more likely outcome than a high-service retailer doing so. We then solve the manufacturer's problem and find that there are several instances when a retailer's advertising decisions are different from what the manufacturer would want. We describe the nature of this channel coordination problem and identify some solutions.
Wholesale price discrimination: Innovation incentives and upstream competition
Journal of Economics & Management Strategy, 2018
In intermediate good markets where there are alternative supply sources, wholesale price discrimination may enhance innovation incentives downstream. We consider a vertical chain where a dominant firm and a competitive fringe supply imperfect substitutes to duopoly retailers which carry both varieties. We show that a ban on price discrimination by the dominant supplier makes uniform pricing credible and reduces retailers' incentives to decrease the cost of acquiring the competitively supplied variety, leading to higher upstream profits and lower downstream welfare. Our analysis complements existing results by identifying a novel channel through which wholesale price discrimination can improve dynamic market efficiency. 1 | INTRODUCTION The literature on price discrimination in intermediate good markets has focused mainly on situations where an upstream supplier is unconstrained or where downstream firms single source. However, downstream firms often have access to different suppliers, rather than being locked into a single upstream supplier. They also frequently multisource and do not allocate all of their volume to a single supplier on the basis of price alone even when upstream firms produce a relatively homogenous input for their product. 1 Moreover, if there is differentiation between the products of the upstream firms, then downstream firms may be purchasing from different suppliers to produce different varieties of their own products. Indeed, when the downstream activity is retailing, often multiple upstream differentiated suppliers' products are sold by each downstream competitor. For example, grocery stores commonly sell both branded products supplied by dominant manufacturers and differentiated varieties, including private labels. This paper revisits the impact of price discrimination by a dominant supplier on downstream innovation incentives and welfare in a model where downstream firms resell both the supplier's product and a differentiated substitute available from a competitive fringe. We identify downstream firms' investment in reducing the cost of access to the differentiated alternative as a novel channel through which wholesale price discrimination may improve the dynamic efficiency of the market. A lower cost of accessing the fringe product may result from the retailer investing in own distribution assets specific to that product. 2 If a monopoly supplier price discriminates against single-product downstream firms, the retailers which are more efficient in retailing pay a higher price because their demand for the supplier's product is less elastic (DeGraba, 1990; Katz, 1987). This 'distortion' effect (handicapping of more efficient firms) is also present in our setting with upstream competition and multiproduct retailers. However, we focus on an additional effect by distinguishing between downstream firms' relative efficiency in retailing and their relative efficiency in acquiring the differentiated substitute.
Uniform vs. Retailer-Specific Pricing: Incentive Alignment to Enhance Supply Chain Efficiency
Production and Operations Management, 2013
W e consider a supplier selling to multiple retailers using one of two constant wholesale pricing strategies: a uniform wholesale price (UWP) vs. a retailer-specific wholesale price (RSWP). In line with the prior literature in economics, our initial finding is that as long as retailers are asymmetric, then (a) the supplier and less efficient retailer would prefer the RSWP strategy and (b) the more efficient retailer would prefer the UWP strategy. By examining the total profits of the supply chain under each pricing strategy, we present a new result: the UWP strategy results in a greater degree of supply chain efficiency as compared to the RSWP strategy. The key intuition driving this result is that by charging a UWP, the supplier signals a fair treatment for downstream retailers, which leads to the more efficient retailer being able to reduce market prices and hence capture a larger share of market demand. Noting that the supplier prefers the RSWP scheme as compared to the UWP scheme, we propose a contract which comprises two components: a UWP per unit complemented with a slotting allowance or side payment. The contract is always preferred by the supplier and also leads to greater supply chain efficiency.
RAIRO - Operations Research, 2020
Internet and its accessible devices (e.g., mobiles, computers) are the unmitigated blessings to the people. Nowadays, internet connectivity almost eliminates all kinds of blockades for the verification of authentication, comparison of prices, and services for a product. Consequently, the market has been becoming more competitive compared to decision making. In this paper, we construct a multi-channel supply chain (MCSC) frameworks with traditional channels as well as a direct channel (DC), where the manufacturer provides services to the customers for both the cases. Then the optimal decisions of the manufacturer and the retailers are examined. The optimal pricing decisions and services are discussed and also compared the profits with one another under various cases (Stackelberg settings, strategic alliance, and two types of no improved service). Then the sensitivity of the service cost coefficients and the cross-channel price coefficients on the profits for each player and the suppl...