Pricing Policy in a Supply Chain: Negotiation or Posted Pricing

This article examines the choice of pricing policy (posted pricing or negotiation) toward end customers in a supply chain. Many retailers actively decide whether or not to encourage negotiation on the shop floor. Of course, the retailer's pricing policy influences not only the retailer's profit, but also the profits of the manufacturers who sell through the retailer. However, little is known about the forces that shape the pricing policy when two self‐interested parties interact in a supply chain. We consider two alternative models depending on who has the power to decide the pricing policy: the manufacturer or the retailer. We find that an increase in the wholesale price weakens the retailer's ability to price discriminate through negotiation. Therefore, the retailer prefers negotiation at lower wholesale prices and posted pricing at higher wholesale prices. We also find that whenever the retailer prefers negotiation, the manufacturer does too. Therefore, the retailer's discretion over the pricing policy causes friction only when the retailer wants to use posted pricing, while the manufacturer wishes the retailer to use negotiation. We show that such friction arises only when product availability or the cost of negotiation is moderate. In this case, we show that the manufacturer may offer a substantial discount to persuade the retailer to negotiate. Surprisingly, in this region of friction, a decrease in the supply chain's capacity or an increase in negotiation costs (both of which are typically considered as worsening the retailer's business environment) translates into higher profit for the retailer.     

Mitigating Supply Uncertainty: The Interplay Between Diversification and Pricing

We consider a firm's sourcing problem from one reliable supplier and one unreliable supplier in two price‐setting scenarios. In the committed pricing scenario, the firm makes the pricing decision before the supply uncertainty is resolved. In the responsive pricing scenario, the firm's pricing decision is made after the supply uncertainty is resolved. For the committed pricing scenario, we develop a condition on supply uncertainty that guarantees the unimodality of the firm's objective function. By comparing the firm's optimal diversification decisions in the two pricing scenarios, we examine the interplay of supply diversification strategy and responsive pricing strategy in mitigating supply uncertainty. While both strategies are effective in mitigating supply uncertainty, we show that they are not necessarily substitutes. The relationship between these two strategies depends on two adverse effects caused by supply uncertainty: the lost‐revenue effect and the lost‐goodwill effect. More specifically, when the lost‐revenue effect dominates the lost‐goodwill effect, these two strategies are complements; otherwise, they are substitutes. Furthermore, we examine the impact of market size, price sensitivity, supplier reliability, and failure rebate on the interplay between these two strategies, and discuss the implications of our results. Finally, we extend our analysis to the case of two unreliable suppliers and show that the insights regarding the interplay between diversification and pricing continue to hold.     

公平感对供应链成员定价决策影响的研究

本文研究公平感对由一个供应商和一个零售商组成的二级供应链中的定价决策的影响,其中供应商决定批发价格,零售商在接受供应商批发价格合同之后决定零售价格,市场需求受到零售价格的线性影响.采用管理实验方法得出,首先,供应商的批发价格和零售商的零售价格均分别低于完全理性假设下的均衡解;供应商是利他性的,即,乐于看到零售商收益的增加,并且,供应商认为零售商是完全理性的,即零售商的决策目标是最大化自身收益;然而,零售商却是刻毒性的,即乐于看到供应商收益的减少.其次,批发价格的变异度大于零售价格的,即供应商决策的难度大于零售商的.给管理者的启示是:供应商应考虑零售商的刻毒性的特征,降低批发价格,以提高零售商接受供应商所提批发价格的概率;此外,还应该为供应商提供辅助决策手段,以降低批发价格的变异度,提高决策的准确性     

Fairness in Selling to the Newsvendor

This paper studies the impact of fairness concerns on supply chain performance (SCP) in the two‐party newsvendor setting. We extend prior fairness analysis to a wide range of demand distributions, and also allow the degree and definition of fairness to assume a broader range of preferences than those in prior literature. Contrary to prior literature, we find that if the retailer's ideal allocation to the supplier is not sufficiently large, regardless of demand variability, a fair‐minded retailer makes no difference to system efficiency when facing a traditional profit‐maximizing supplier. Only when the retailer's ideal allocation to the supplier is above a threshold can the retailer's fairness concern improve the system efficiency for sufficiently high demand uncertainty. In order for the retailer's fairness concern to improve expected profits of both parties compared to the traditional supply chain case (win–win), the demand uncertainty cannot be too low, the retailer is not very averse to disadvantageous inequity, and his ideal allocation to the supplier is within a specific range. If only the supplier is concerned for fairness, the results range from worsening to improving (but not coordinating) the system and a win–win situation is impossible. Finally, when both the supplier and retailer are fair‐minded, SCP is improved unless both parties prefer to allocate small portions of system profit to the other. Again, win–win will be achieved only when the demand uncertainty is sufficiently high, the retailer's ideal allocation is within a certain range, and he is not very averse to disadvantageous inequity.     

Strategic Sourcing in the Presence of Uncertain Supply and Retail Competition

This study develops an analytical model to evaluate competing retail firms' sourcing strategies in the presence of supply uncertainty. We consider a common supplier that sells its uncertain supply to two downstream retail firms engaging in price competition in a horizontally differentiated product market. The focal firm has a dual‐sourcing option, while the rival firm can only source from the common supplier. We assess the system‐wide effects of supply uncertainty on the focal firm's incentive to pursue the dual‐sourcing strategy. We find that the focal firm's dual‐sourcing strategy can create a win–win situation that leads to increased retail prices and expected profits for both firms. Furthermore, under certain conditions, we show that it is beneficial for the focal firm to strategically source from the common supplier, even if its alternative supplier offers a lower wholesale price. Overall, we identify two types of incentives for adopting the dual‐sourcing strategy: the incentive of mitigating supply risk through supplier diversification and the incentive of strategic sourcing for more effective retail competition.     

产能不确定供应商的风险厌恶行为对供应链的影响

针对具有产能不确定性的风险厌恶供应商和风险中性零售商组成的供应链系统,本文采用经典的风险指标Value-at-risk(VaR)衡量供应商的风险厌恶程度,并将其作为供应商的优化约束条件之一。在斯坦伯格顺序博弈的模型框架下,零售商做定价和订货量决策,供应商做批发价决策。本文求得供应商批发价在VaR约束下的理论上下界,研究了风险厌恶程度对最优批发价的影响。与风险中性环境下的结果相比,在设立合理目标利润的前提下,高风险厌恶程度可能使得供应商提高批发价,低风险厌恶程度则对供应商批发价无影响。当目标利润设立很高时,供应商为了逐利将会降低批发价诱导零售商提高订货量。     

Joint Pricing and Contingent Free-Shipping Decisions in B2C Transactions

We consider an online retailer's joint pricing and contingent free-shipping (CFS) decisions in both monopoly and duopoly structures, which is an important marketing-operations interface problem. We begin by investigating the impacts of a retailer's decisions on consumers' purchase behaviors, and show that the CFS strategy is useful to acquire the consumers with large order sizes. Then, we compute the probability of repeated purchases, and construct an expected profit function for an online retailer in the monopolistic setting. We find that the fixed shipping fees may have the largest impact on the retailer's profit among all shipping-related parameters, and the retailer can benefit more from homogeneous markets than from heterogeneous ones. Next, we consider the competition between two retailers in the duopoly structure, and analytically show that, if two retailers have identical fixed and variable shipping fees, then their equilibrium decisions are equal. In order to numerically find a Nash equilibrium for two retailers, we develop a simulation approach using Arena and OptQuest. Our simulation-based examples suggest that, as a result of the competition, the two retailers should decrease their profit margins but increase their CFS cutoff levels if they have the same fixed and also the same variable shipping fees.     

Supply Contract Design for Competing Heterogeneous Suppliers under Asymmetric Information

This study considers a supply chain with two heterogeneous suppliers and a common retailer whose type is either low‐volume or high‐volume. The retailer's type is unknown to the suppliers. The flexible supplier has a high variable cost and a low fixed cost, while the efficient supplier has a low variable cost and a high fixed cost. Each supplier offers the retailer a menu of contracts. The retailer chooses the contract that maximizes its expected profit. For this setting, we characterize the equilibrium contract menus offered by the suppliers to the retailer. We find that the equilibrium contract menus depend on which supplier–retailer match can generate the highest supply chain profit and on how much information rent the supplier may need to pay. An important feature of the equilibrium contract menus is that the contract assigned to the more profitable retailer will coordinate the supply chain, while the contract assigned to the less profitable retailer may not. In addition, in some circumstances, the flexible supplier may choose not to serve the high‐volume retailer, in order to avoid excessive information rent.     

Technical Note—Demand Uncertainty Reduction in Decentralized Supply Chains

This note analyzes the effects associated with reducing demand uncertainty in a decentralized supply chain comprising one manufacturer, one retailer, and a wholesale price contract that governs the transactions between them. The demand uncertainty level is parameterized through a mean‐preserving spread, and the manufacturer's and the retailer's equilibrium decisions are solved accordingly. We consider the case of an exogenous retail price as well as the case of an endogenous retail price, and we find in both cases that the manufacturer's and the retailer's expected profits in equilibrium are not necessarily monotone decreasing in the uncertainty level. Thus, we find that, even if the cost of reducing demand uncertainty is zero, uncertainty reduction can hurt rather than benefit either or both members of the supply chain.     

Push and Pull Contracts in a Local Supply Chain with an Outside Market*

Wholesale price contracts are widely studied in a single supplier‐single retailer supply chain, but without considering an outside market where the supplier may sell if he gets a high enough price and the retailer may buy if the price is low enough. We fill this gap in the literature by studying push and pull contracts in a local supplier–retailer supply chain with the presence of an outside market. Taking the local supplier's maximum production capacity and the outside market barriers into account, we identify the Pareto set of the push and/or pull contracts and draw managerial implications. The main results include the following. First, the most inefficient point of the pull Pareto set cannot always be removed by considering both the push and pull contracts. Second, the supplier's production capacity plays a significant role in the presence of an outside market; it affects the supplier's negotiating power with the retailer and the coordination of the supply chain can be accomplished only with a large enough capacity. Third, the import and export barriers influence the supply chain significantly: (i) an export barrier in the local market and the supplier's production capacity influence the supplier's export strategy; (ii) a low import (resp., export) barrier in the local market can improve the local supply chain's efficiency by use of a push (resp., pull) contract; and (iii) a high import (resp., export) barrier in the local market encourages the supplier (resp., retailer) to bear more inventory risk.     

Pay‐Back‐Revenue‐Sharing Contract in Coordinating Supply Chains with Random Yield

We consider coordination issues in supply chains where supplier's production process is subject to random yield losses. For a simple supply chain with a single supplier and retailer facing deterministic demand, a pay back contract which has the retailer paying a discount price for the supplier's excess units can provide the right incentive for the supplier to increase his production size and achieve coordination. Building upon this result, we consider coordination issues for two other supply chains: one with competing retailers, the other with stochastic demand. When retailers compete for both demand and supply, they tend to over‐order. We show that a combination of a pay back and revenue sharing mechanism can coordinate the supply chain, with the pay back mechanism correcting the supplier's under‐producing problem and the revenue sharing mechanism correcting the retailers' over‐ordering problem. When demand is stochastic, we consider a modified pay‐back‐revenue‐sharing contract under which the retailer agrees to not only purchase the supplier's excess output (beyond the retailer's order), but also share with the supplier a portion of the revenue made from the sales of the excess output. We show that this contract, by giving the supplier additional incentives in the form of revenue share, can achieve coordination.     

Dynamic Pricing and Inventory Management with Dual Suppliers of Different Lead Times and Disruption Risks

It is common for a firm to make use of multiple suppliers of different delivery lead times, reliabilities, and costs. In this study, we are concerned with the joint pricing and inventory control problem for such a firm that has a quick‐response supplier and a regular supplier that both suffer random disruptions, and faces price‐sensitive random demands. We aim at characterizing the optimal ordering and pricing policies in each period over a planning horizon, and analyzing the impacts of supply source diversification. We show that, when both suppliers are unreliable, the optimal inventory policy in each period is a reorder point policy and the optimal price is decreasing in the starting inventory level in that period. In addition, we show that having supply source diversification or higher supplier reliability increases the firm's optimal profit and lowers the optimal selling price. We also demonstrate that, with the selling price as a decision, a supplier may receive even more orders from the firm after an additional supplier is introduced. For the special case where the quick‐response supplier is perfectly reliable, we further show that the optimal inventory policy is of a base‐stock type and the optimal pricing policy is a list‐price policy with markdowns.     

Supplier Encroachment and Investment Spillovers

It is conventional wisdom that a manufacturer's encroachment into retail space will likely hurt an existing retailer. In contrast to this conventional belief, current research indicates that a retailer may welcome a manufacturer's encroachment despite the new competition in the final market. The encroachment may help the manufacturer have some “skin in the game” at the retail level, which will cause the manufacturer to make a selfish cost‐reducing investment that spills over to the retailer as a lower wholesale price. Such a spillover effect enhances the retailer's profit as long as the encroachment does not result in extreme retail competition by a certain degree of product differentiation, and ultimately generates Pareto gains in the supply chain. The spillover effect is so robust that the retailer's benefit from the encroachment remains even after considering potential mitigating factors such as selling costs, a nonlinear form of cost reduction, decentralized encroachment, additional retail competition, price competition, and a negotiation between the manufacturer and the retailer.     

When Does a Retailer's Advance Selling Capability Benefit Manufacturer,Retailer, or Both?

Advance selling (AS) from a retailer to consumers is commonly observed in practice. With an AS capability, a retailer has the option to sell in advance or not. Having the AS option seems to increase flexibility and thus profit for a retailer. However, we show that the AS option can hurt the retailer's profit as well as supply chain performance. We identify two thresholds for a product's marginal production cost. A retailer's AS option benefits both the manufacturer and retailer when the marginal production cost is high, that is, above both thresholds. It benefits the manufacturer but hurts the retailer when the marginal production cost is moderate, that is, between the two thresholds. The result is ambiguous when the marginal production cost is low, that is, below both thresholds. We find that consumer valuation uncertainty under AS is the key driving force for the surprising result that having the retailer's AS option can hurt the retailer. When compared to the scenario where the retailer does not have the AS option, we find that the manufacturer's optimal wholesale price weakly decreases under the retailer's AS option if the marginal production cost is high. The statement is reversed if the marginal production cost is moderate or low.     

Two-period pricing and ordering policy for the dominant retailer in a two-echelon supply chain with demand uncertainty

Retailing channels are increasingly being dominated by ‘power’ retailers who are in a position to dictate prices and ordering schedules to manufacturers and suppliers. A dominant retailer, such as Wal-Mart, has the ‘power’ to decide retail prices of products because there are so many manufacturers who are keen to sell their products through or to such a large and powerful retailer. Several products, such as electronic products, can be sold in the market for some periods during their lifecycles before they retreat, except when they are not popular with consumers after been introduced. Therefore, in case of such products, the retailer should not just consider a single-period pricing and ordering policy. It should make dynamic pricing and ordering decisions based on market demand forecast, in order to obtain maximum cumulative profit from the product during its lifecycle. In this study, we consider this scenario and construct a two-period model to discuss pricing and ordering problems for a dominant retailer with demand uncertainty in a declining price environment. We show that the maximum expected profit function is continuous concave, so the optimal solution to pricing and ordering policy exists and it is the one and only. We also analyze sensitivity of retailer's expected profit to the effects of parameters of price-discount sharing scheme and market demand.     

The Newsvendor Problem and Price‐Only Contract When Bankruptcy Costs Exist

We study a supply chain of a supplier selling via a wholesale price contract to a financially constrained retailer who faces stochastic demand. The retailer might need to borrow money from a bank to execute his order. The bank offers a fairly priced loan for relevant risks. Failure of loan repayment leads to a costly bankruptcy (fixed administrative costs, costs proportional to sales, and a depressed collateral value). We identify the retailer's optimal order quantity as a function of the wholesale price and his total wealth (working capital and collateral). The analysis of the supplier's optimal wholesale price problem as a Stackelberg game, with the supplier the leader and the retailer the follower, leads to unique equilibrium solutions in wholesale price and order quantity, with the equilibrium order quantity smaller than the traditional newsvendor one. Furthermore, in the presence of the retailer's bankruptcy risks, increases in the retailer's wealth lead to increased supplier's wholesale prices, but without the retailer's bankruptcy risks the supplier's wholesale prices stay the same or decrease in retailer's wealth.     

Impacts of demand uncertainty on retailer's dominance and manufacturer-retailer supply chain cooperation

Recent studies in marketing and distribution channels have shown that the balance of power between manufacturers and retailers is shifting. Based on this observation, we investigate a two-echelon supply chain with a manufacturer and a retailer in this paper. We first develop retailer-dominant non-cooperative game models by introducing a sensitivity of retailer's order quantity to manufacturer's wholesale price; then we analyze two cooperative scenarios, in which the Nash bargaining model is utilized to implement profit sharing between the manufacturer and the retailer. Under the assumption that the manufacturer and the retailer are risk-neutral, we find that the manufacturer and the retailer can bargain to cooperate at any level of retail-market demand uncertainty with exogenous retail price. However, the cooperation is conditional on retail-market demand uncertainty with endogenous retail price: it can be implemented if the fluctuation of retail-market demand is relatively small, and the measure of retail-market demand uncertainty does not exceed an upper bound. Theoretical and numerical analyses show that the retailer's dominance over the manufacturer increases with the increase in the sensitivity of retailer's order quantity to manufacturer's wholesale price under a limitation of retail-market demand uncertainty. Numerical analyses also show that the retailer's dominance decreases with the increase in retail-market demand uncertainty.     

Push or Pull? Auctioning Supply Contracts

Consider a buyer, facing uncertain demand, who sources from multiple suppliers via online procurement auctions (open descending price‐only auctions). The suppliers have heterogeneous production costs, which are private information, and the winning supplier has to invest in production capacity before the demand uncertainty is resolved. The buyer chooses to offer a push or pull contract, for which the single price and winning supplier are determined via the auction. We show that, with a pull contract, the buyer does not necessarily benefit from a larger number of suppliers participating in the auction, due to the negative effect of supplier competition on the incentive of supplier capacity investment. We thus propose an enhanced pull mechanism that mitigates this effect with a floor price. We then analyze and compare the outcomes of auctions for push and (enhanced) pull contracts, establishing when one form is preferred over the other based on the buyer's profits. We also compare our simple, price‐only push and pull contract auctions to the optimal mechanisms, benchmarking the performance of the simple mechanisms as well as establishing the relative importance of auction design and contract design in procurement auctions.     

Impact of Demand Uncertainty on Stability of Supplier Alliances in Assembly Models

In their recent paper, Nagarajan and Sošić study an assembly supply chain in which n suppliers sell complementary components to a downstream assembler, who faces a price‐sensitive deterministic demand. Suppliers may form alliances, and each alliance then sells a kit of components to the assembler and determines the price for that kit. The assembler buys the components (kits) from the alliances and sets the selling price of the product. Nagarajan and Sošić consider three modes of competition—supplier Stackelberg, vertical Nash (VN), and assembler Stackelberg models—which correspond to different power structures in the market, and study stable supplier alliances when the assembler faces linear and isoelastic demand. In this paper, we study the impact that demand uncertainty has on stability results obtained in Nagarajan and Sošić. We first analyze models in which all decisions are made before the uncertainty is resolved, and show that the alliance of all suppliers remains stable when demand is isoelastic, or under Stackelberg models when demand is linear. However, demand uncertainty may change stability results when both parties make decisions simultaneously (VN model) and demand is linear. We then extend our results by considering scenarios in which some decisions may be postponed and made after the actual demand is known. When the ordering quantity can be determined after observing the true demand, we show that stable outcomes correspond to those obtained in the deterministic case and uncertainty has no impact on coalition stability; if only the assembler's pricing decision is postponed, we need additional conditions for stability results to carry over in the additive demand model.     

Cooperative Advertising and Pricing in a Dynamic Stochastic Supply Chain: Feedback Stackelberg Strategies

Cooperative (co‐op) advertising is an important instrument for aligning manufacturer and retailer decisions in supply chains. In this, the manufacturer announces a co‐op advertising policy, i.e., a participation rate that specifies the percentage of the retailer's advertising expenditure that it will provide. In addition, it also announces the wholesale price. In response, the retailer chooses its optimal advertising and pricing policies. We model this supply chain problem as a stochastic Stackelberg differential game whose dynamics follows Sethi's stochastic sales‐advertising model. We obtain the condition when offering co‐op advertising is optimal for the manufacturer. We provide in feedback form the optimal advertising and pricing policies for the manufacturer and the retailer. We contrast the results with the advertising and price decisions of the vertically integrated channel, and suggest a method for coordinating the channel.