Vertically restrictive pricing in supply chains with price-dependent demand (original) (raw)

Retail price markup commitment in decentralized supply chains

European Journal of Operational Research, 2009

We investigate the operational decisions and resulting profits for a supply chain facing price-dependent demand under a policy where there is an ex-ante commitment made on the retail price markup. We obtain closed-form solutions for this policy under the assumption of a multiplicative demand function and we analytically compare its performance with that of a traditional price-only policy. We compare these results to results obtained when demand follows a linear additive form. These formulations are shown to be qualitatively different as the manufacturer's wholesale pricing decision is independent of the retail price markup commitment in the multiplicative case, but not when demand is linear additive. We demonstrate that the ex-ante commitment can lead to Pareto-improving solutions under linear additive demand, but not under the multiplicative demand function. We also consider the effect of pricing power in the supply chain by varying who determines the retail price markup.

Vertical Control of Price and Inventory

American Economic Review, 2007

This paper offers a simple approach to the theory of decentralizing inventory and pricing decisions along a supply chain. We consider an upstream manufacturer selling to two outlets, which compete as differentiated duopolists and face uncertain demand. Demand spillovers between the outlets arise in the event of stockouts. The price mechanism, in which each outlet pays a two-part price and chooses price and inventory, virtually never coordinates incentives efficiently. Contracts that can elicit first-best decisions include resale price floors or buy-back policies (retailer-held options to sell inventory back to the manufacturers). (JEL D21, L13, L14, M11)

Price markdown scheme in a multi-echelon supply chain in a high-tech industry

2011

This paper studies the price markdown scheme in a supply chain that consists of a supplier, a contract manufacturer (CM), and a buyer (retailer). The buyer subcontracts the production of the final product to the CM. The CM buys the components from the supplier and charges the buyer a service fee for the final product produced. The price markdown is made possible by the supplier with the development of new manufacturing technologies that reduce the production cost for the sourced component. Consequently, the buyer adjusts the retail price in order to possibly stimulate stronger demand that may benefit both the supplier and the buyer. Under this scenario, we identify the optimal discount pricing strategies, capacity reservation, and the stocking policies for the supplier and the buyer. We also investigate the optimal inventory decision for the CM to cope with the price discount by considering both demand and delivery uncertainties. Our results suggest that higher production cost accelerates the effects of higher price sensitivity on lowering the optimal capacity and stocking policies in the supply chain. The effect of mean demand error on the optimal prices is relatively marginal compared with that from price sensitivity. We also found that increasing the standard deviation of the random demand does not necessarily increase the stocking level as one would predict. The results show that delivery uncertainty plays an important role in the inventory carried beyond the price break. We discuss potential extensions for future research.

Vertical pricing competition in supply chains: the effect of production experience and coordination

International Transactions in Operational Research, 2008

We consider a two-echelon supply chain consisting of a single supplier (producer) and a retailer. The supplier determines the wholesale price with a production cost decreasing with experience. The retailer orders products from the supplier to meet demands. Negative effects of a vertical competition in static supply chain models are typically attributed to a double marginalization. Using an intertemporal supply chain problem, defined by a differential game, we show that in addition to the ''cost'' of double marginalization, the margin gained from reducing production costs affects the supply chain performance as well. In our analysis, performance is shown to deteriorate even more than the deterioration observed in static problems with no learning (experience). To improve the performance, we provide a time-variant version to the well-known, pure, two-part tariff strategy, which in its dynamic framework may coordinate the supply chain only partially. Efficient coordination in a supply chain is shown to be possible if a mixed two-part tariff strategy is employed, however.

Monopoly Pricing in a Vertical Market with Demand Uncertainty

2020

We study a vertical market with an upsteam supplier and multiple downstream retailers. Demand uncertainty falls to the supplier who acts first and sets a uniform wholesale price before the retailers observe the realized demand and engage in retail competition. Our focus is on the supplier's optimal pricing decision. We express the price elasticity of expected demand in terms of the mean residual demand (MRD) function of the demand distribution. This allows for a closed form characterization of the points of unitary elasticity that maximize the supplier's profits and the derivation of a mild unimodality condition for the supplier's objective function that generalizes the widely used increasing generalized failure rate (IGFR) condition. A direct implication is that optimal prices between different markets can be ordered if the markets can be stochastically ordered according to their MRD functions or equivalently to their elasticities. Based on this, we apply the theory of ...

Pricing and Lead Time Decisions in Decentralized Supply Chains

Management Science, 2007

zhuxiang@ust.hk T his paper studies a decentralized supply chain consisting of a supplier and a retailer facing price-and leadtime-sensitive demands. A Stackelberg game is constructed to analyze the price and lead time decisions by the supplier as the leader and the retailer as the follower. The equilibrium strategies of the two players are obtained. Using the performance of the corresponding centralized system as a benchmark, we show that decentralized decisions in general are inefficient and lead to inferior performance due to the double marginalization effect. However, further analysis shows that the decision inefficiency is strongly influenced by market and operational factors, and if the operational factors are dominating, it may not be significant. This shows that before pursuing a coordination strategy with retailers, a supplier should first improve his or her own internal operations.

Multi-period modeling of two-way price commitment under price-dependent demand

European Journal of Operational Research, 2012

This paper examines the use of linear-pricing contracts as well as price-commitment policies in dynamic contracting of multiple-period, finite-time horizons. Two specific forms of price commitment are considered: one on the part of the retailer through retail-fixed-markup contracts and one on the part of the manufacturer through price-protection contracts. Optimal policies for each form of price commitment are analytically derived as are optimal policies for the traditional price-only and centralized supply chain scenarios. We prove that under non-increasing pricedependent demand, there are unique optimal solutions in each period for retail price and order size. We show that the existence of retailer inventories between periods causes the supply chain performance to differ from a static single-period model. Further, we show that a supplier offers a price-protection policy as a signal to the retailer to resolve the gaming that naturally occurs under price-only and effectively decouples the multi-period dynamic contracting setting into repeated single-period scenarios. However, this can actually inhibit supply chain performance. On the retail commitment side, we find that retail-fixed-markup policies are quite effective in improving supply chain efficiency. We show that such policies can lead to Pareto-improvement over priceonly and can even coordinate the supply chain in some situations.

Monopoly Pricing in a Vertical Market with Upstream Demand Uncertainty

arXiv: Optimization and Control, 2017

Pricing and replenishment policies in dual-channel supply chain under continuous unit cost decrease

This paper explores pricing and replenishment policies for a high-tech product in a dual-channel supply chain that consists of a brick-and-mortar channel and an internet channel. The unit cost of the product decreases over its short life cycle. Assuming the manufacturer as the Stackelberg leader, the optimal pricing and replenishment policy is analysed mathematically. It is found that there is a severe price competition between the retail and online channel, and product compatibility has a significant impact on the pricing policy. In particular (i) customers' higher retail channel preference above a threshold leads to non-coexistence of dual-channel, (ii) the dual-channel is non-profitable for product compatibility outside an interval and (iii) higher or lower retail price in comparison to online price is dependent on product compatibility. Also, the retailer's higher setup cost may lead to non-existence of online channel. Finally, a profit sharing mechanism through wholesale price adjustment resolves channel conflict. A numerical example is illustrated to justify our proposed model.

Coordination and pricing decisions in a closed-loop supply chain

International Journal of Services and Operations Management, 2018

This paper investigates coordination and pricing decisions in a closed-loop supply chain (CLSC) with a manufacturer, a remanufacturer, and a retailer. We also consider a supplier who provides both the manufacturer and remanufacturer with new parts. We follow the practice by assuming vertically differentiated new and remanufactured products. We show how the optimal prices and quantities for new and remanufactured products at the retailer level, and the total CLSC profits and the supplier's profits compare with each other across different CLSC coordination structures. We also investigate the sensitivity of our results to the quality of returns and consumers' perceptions. We find that both the CLSC and the supplier enjoy the highest profits from the coordination between the retailer and the manufacturer. Furthermore, we show that the coordination between the retailer and the remanufacturer results in the lowest profits for the CLSC members, but not necessarily the lowest for th...

Vertically restrictive pricing in supply chains with price-dependent demand (original) (raw)

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