Article ID: | iaor20072728 |
Country: | United States |
Volume: | 53 |
Issue: | 6 |
Start Page Number: | 485 |
End Page Number: | 501 |
Publication Date: | Sep 2006 |
Journal: | Naval Research Logistics |
Authors: | Raturi Amitabh S., Fry Michael J., Liu Yong |
Keywords: | supply & supply chains |
We examine the behavior of a manufacturer and a retailer in a decentralized supply chain under price-dependent, stochastic demand. We model a retail fixed markup (RFM) policy, which can arise as a form of vertically restrictive pricing in a supply chain, and we examine its effect on supply chain performance. We prove the existence of the optimal pricing and replenishment policies when demand has a linear additive form and the distribution of the uncertainty component has a nondecreasing failure rate. We numerically compare the relative performance of RFM to a price-only contract and we find that RFM results in greater profit for the supply chain than the price-only contract in a variety of scenarios. We find that RFM can lead to Pareto-improving solutions where both the supplier and the retailer earn more profit than under a price-only contract. Finally, we compare RFM to a buyback contract and explore the implications of allowing the fixed markup parameter to be endogenous to the model.