Uniform vs. Retailer-Specific Pricing: Incentive Alignment to Enhance Supply Chain Efficiency

Uniform vs. Retailer-Specific Pricing: Incentive Alignment to Enhance Supply Chain Efficiency

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Article ID: iaor201524762
Volume: 23
Issue: 7
Start Page Number: 1176
End Page Number: 1182
Publication Date: Jul 2014
Journal: Production and Operations Management
Authors: ,
Keywords: retailing, management, economics, simulation
Abstract:

We 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.

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