Price Incentives and Coordination in a Two-Product Decentralized Supply Chain

Price Incentives and Coordination in a Two-Product Decentralized Supply Chain

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Article ID: iaor201522035
Volume: 45
Issue: 3
Start Page Number: 507
End Page Number: 533
Publication Date: Jun 2014
Journal: Decision Sciences
Authors: , ,
Keywords: decision, retailing
Abstract:

We investigate pricing incentives for competing retailers who distribute two variants of a manufacturer's product in a decentralized supply chain. Under a two‐dimensional Hotelling model, we derive decentralized retailers' prices for the products, and distortions in pricing when compared to centrally optimal prices. We show that price distortions decrease as consumers' travel cost between retailers increases, due to less intense competition. However, price distortions do not change monotonically in consumers' switching cost between products within stores. To fix decentralized retailers' price distortions, we construct a two‐part pricing contract that coordinates the supply chain. We show that the coordinating contract is Pareto‐improving and analyze increase in the supply chain profit under coordination.

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