Rental price and rental duration under retail competition

Consider a retailer that rents products to customers for a pre-specified rental duration. By considering the dynamics of uncertain rental demand and return processes, we first present a base model that is intended to analyze the impact of rental duration on the stocking level, the rental price, and the retailer’s profit. Due to the complexity of the base model, we develop an approximation scheme to obtain tractable results. Also, we apply the base model to analyze a situation in which a retailer enters a revenue sharing agreement with a distributor. Moreover, we expand our base model to address the issue of competition in rental duration and rental price. The analysis of our competitive model in a duopolistic environment suggests that the market equilibrium depends on the market potential and the rental duration sensitivity. Furthermore, we establish conditions under which one firm will charge a lower rental price while the other firm will offer a longer rental duration in equilibrium.     

The impact of consumer returns policies on consignment contracts with inventory control

We consider a consignment contract with consumer non-defective returns behavior. In our model, an upstream vendor contracts with a downstream retailer. The vendor decides his consignment price charged to the retailer for each unit sold and his refund price for each returned item, and then the retailer sets her retail price for selling the product. The vendor gets paid based on net sold units and salvages unsold units as well as returned items in a secondary market. Under the framework, we study and compare two different consignment arrangements: the retailer/vendor manages consignment inventory (RMCI/VMCI) programs. To study the impact of return policy, we discuss a consignment contract without return policy as a benchmark. We show that whether or not the vendor offers a return policy, it is always beneficial for the channel to delegate the inventory decision to the vendor. We find that the vendor’s return policy depends crucially on the salvage value of returns. If the product has no salvage value, the vendor’s optimal decision is not to offer a return policy; otherwise, the vendor can gain more profit by offering a return policy when the salvage value turns out to be positive.     

Manufacturer’s revenue-sharing contract and retail competition

This paper investigates a revenue-sharing contract for coordinating a supply chain comprising one manufacturer and two competing retailers. The manufacturer, as a Stackelberg leader, offers a revenue-sharing contract to two competing retailers who face stochastic demand before the selling season. Under the offered contract terms, the competing retailers are to determine the quantities to be ordered from the manufacturer, prior to the season, and the retail price at which to sell the items during the season. The process of pricing and ordering is expected to result in an equilibrium as in the Bayesian Nash game. On the basis of anticipated responses and actions of the retailers, the manufacturer designs the revenue-sharing contract. Adopting the classic newsvendor problem model framework and using numerical methods, the study finds that the provision of revenue-sharing in the contract can obtain better performance than a price-only contract. However, the benefits earned under the revenue-sharing contract by different supply chain partners differ because of the impact of demand variability and price-sensitivity factors. The paper also analyses the impact of demand variability on decisions about optimal retail price, order quantity and profit sharing between the manufacturer and the retailers. Lastly, it investigates how the competition (between retailers) factor influences the decision-making of supply chain members in response to uncertain demand and profit variability.     

Supply quality management with wholesale price and revenue-sharing contracts under horizontal competition

In a number of industries (e.g., the airplane industry, aerospace industry, auto industry, or computer industry), certain suppliers essentially have a monopoly on the production technology for key components, and inevitably manufacturers in these industries have common suppliers. A key part of manufacturers’ work with suppliers concerns improving the quality of their respective products, which gives rise to a collaborative activity usually termed as “supply quality management”. When the manufacturers are competitors, they do not wish to see a common supplier dividing his involvement in quality improvement unequally between themselves and their rivals. However, as the suppliers collaborate with several manufacturers, it is highly questionable whether their efforts will be strictly equivalent for each manufacturer. In this paper, a non-cooperative dynamic game is formulated in which a single supplier collaborates with two manufacturers on design quality improvements for their respective products. The manufacturers compete for market demand both on price and design quality. The paper analyzes how each party should allocate resources for quality improvement over time. In order to take into account the potential coordinating power of the compensation scheme adopted in this type of decentralized setting, we compare the possible outcomes under a wholesale price contract and a revenue-sharing contract.     

Markdown money contracts for perishable goods with clearance pricing

It is common in practice that retailers liquidate unsold perishable goods via clearance pricing. Markdown money is frequently used between manufacturers and retailers in such a supply chain setting. It is a form of rebate from a manufacturer to subsidize a retailer’s clearance pricing after the regular season. Two forms of markdown money are percent markdown money, in which the markdown money is limited to only a certain percentage of the retail price markdown, and quantity markdown money, which is essentially a buyback contract or returns policy with a rebate credit paid to the retailer for each unsold unit after the regular season. We show both forms of markdown money contracts can coordinate the supply chain and we discuss their strengths and limitations.     

Price competition with integrated and decentralized supply chains

We consider price competition with a linear demand function and compare two cases. In the first case each distribution channel is vertically integrated, while in the second, decentralised, case the manufacturers and retailers act independently. We explore the effect of varying the level of price competition on the profits of the industry participants and demonstrate the important role played by the spread of underlying market shares. The coefficient of variation of these market shares determines whether decentralised supply chains can outperform integrated supply chains with an appropriate level of competition.     

Supply chain interactions due to store-brand introductions: The impact of retail competition

Store-brand products are of increasing importance in retailing, often causing channel conflict as they compete with national brands. Focusing on the interactions that arise in single-manufacturer single-retailer settings, previous research suggests that one main driver of store-brand profitability to the retailer is that it leads to a reduction of the national-brand wholesale price. Under retail competition, the Robinson Patman Act then introduces an interesting trade-off: A retailer that introduces a store brand incurs the associated costs and risks, while sharing this benefit with its competition. We show that the resulting interactions can cause retailers to play “chicken”, either of them preferring a store-brand introduction by the competitor. Such interactions do not arise in channels with a single retailer, as has been the object of most previous research, and we show that some of the key insights derived from single-retailer models fail to hold when retailers compete. We conduct a numeric study, and our findings suggest that retailers are more likely to randomize their store-brand introduction strategies when customers have strong store preferences, and when the retailers’ store-brand products are similar to the national-brand product in terms of customer valuations and production cost.     

The implications of postponement on contract design and channel performance

We analyze a supply chain consisting of one manufacturer and one retailer under consignment sales with a revenue sharing contract. The manufacturer produces before, but charges price to sell the products through the retailer after the demand curve is revealed. The retailer deducts a fraction from the selling price for each unit sold and remits the balance to manufacturer. We refer to the capability whereby firms delay price decision and make sales in response to actual market condition as postponement. We find that, when market demand admits a multiplicative structure, the revenue share and allocation of channel profit between the firms when they have postponement capability are similar to when they do not have such capability. Postponement improves the profits of individual firms. Such an effect is more phenomenal in the centralized system than in decentralized system, and when the market demand is more sensitive to price changes. However, it causes the profit loss, defined as the percentage deviation of channel profit in the decentralized system relative to the centralized system, to worsen, and the gap widens with retailer’s sales cost. When the demand has an additive structure, while the roles of postponement on firms’ decisions differ slightly from those under the multiplicative structure, the structure of the strategic interactions between firms and relative channel performance are not significantly altered.     

Pricing policies under direct vs. indirect channel competition and national vs. store brand competition

This paper analyzes channel pricing in multiple distribution channels under competition between a national brand (NB) and a store brand (SB), where an NB can be distributed both through a direct channel (e-channel) and an indirect channel (local stores) but an SB can be distributed only through an indirect channel. We first explore cross-brand and cross-channel pricing policies. Formulating the problem as a Nash pricing game, we reach two findings: (1) brand loyalty building is profitable for both an NB and an SB; and (2) marketing decisions are more restrictive for an NB channel than they are for the SB channel. We next assess supply chain coordination and reach two findings: (1) wholesale price change does not coordinate the supply chain and (2) an appropriate combination of markup and markdown prices can achieve both supply chain coordination and a win–win outcome for each channel.     

Long-term and penalty contracts in a two-stage supply chain with stochastic demand

Recent applications of game-theoretic analysis to supply chain efficiency have focused on constructs between a buyer (the retailer or manufacturer) and a seller (the supplier) in successive stages of a supply chain. If demand for the final product is stochastic then the supplier has an incentive to keep its capacity relatively low to avoid creating unneeded capacity. The manufacturer, on the other hand, prefers the supplier’s capacity to be high to ensure that the final demand is satisfied. The manufacturer therefore constructs a contract to induce the supplier to increase its production capacity. Most research examines contracting when final demand is realized after the manufacturer places its order to the supplier. However, if final demand is realized before the manufacturer places its order to the supplier, these types of contracts can be ineffective. This paper examines two contracts under the latter timing scenario: long-term contracts in which the business relationship is repeated, and penalty contracts in which the supplier is penalized for too little capacity. Results indicate long-term contracts increase the profit potential of the supply chain. Furthermore, the penalty contracts can ensure that the supplier chooses a capacity level such that the full profit potential is achieved.     

Optimal inventory management for a retail chain with diverse store demands

Item demands at individual retail stores in a chain often differ significantly, due to local economic conditions, cultural and demographic differences and variations in store format. Accounting for these variations appropriately in inventory management can significantly improve retailers’ profits. For example, it is shown that having greater differences across the mean store demands leads to a higher expected profit, for a given inventory and total mean demand. If more than one inventory shipment per season is possible, the analysis becomes dynamic by including updated demand forecasts for each store and re-optimizing store inventory policies in midseason. In this paper, we formulate a dynamic stochastic optimization model that determines the total order size and the optimal inventory allocation across nonidentical stores in each period. A generalized Bayesian inference model is used for demands that are partially correlated across the stores and time periods. We also derive a normal approximation for the excess inventory from the previous period, which allows the dynamic programming formulation to be easily solved. We analyze the tradeoffs between obtaining information and profitability, e.g., stocking more stores in period 1 provides more demand information for period 2, but does not necessarily lead to higher total profit. Numerical analyses compare the expected profits of alternative supply chain strategies, as well as the sensitivity to different distributions of demand across the stores. This leads to novel strategic insights that arise from adopting inventory policies that vary by store type.     

Analysis of the effectiveness of manufacturer-sponsored retailer gift cards in supply chains

Some manufacturers sponsor “free” retailer gift cards to be given to consumers who purchase their products. These gift cards are paid for by the manufacturer and are redeemable on all products at the retailer. We develop a model of such a supply chain. We analyze cases in which the gift cards’ redemption rate is constant or increasing in gift card value. The results indicate that in addition to the redemption rate and consumers’ valuation for gift card dollars, the profitability of manufacturer-sponsored gift cards depends on the average gross margin of the retailer and the type of purchases consumers make with gift cards. Furthermore, we show that under certain conditions, free gift cards will increase the expected profits of the retailer and manufacturer as well as decrease the retail price of the product. These conditions include a retailer with large average gross margin and consumers using gift cards to purchase products they would not buy with cash otherwise. Furthermore, all consumers, including those who do not redeem the gift card, are more likely to benefit from a reduced retail price when their probability of redeeming the gift card after purchase is equal to their estimated redemption probability at purchase time. We show the conditions under which gift cards are more profitable than cash mail-in rebates. We develop an incentive scheme to improve the performance of supply chains with gift cards.     

A supply chain model with direct and retail channels

We study a dual channel supply chain in which a manufacturer sells to a retailer as well as to consumers directly. Consumers choose the purchase channel based on price and service qualities. The manufacturer decides the price of the direct channel and the retailer decides both price and order quantity. We develop conditions under which the manufacturer and the retailer share the market in equilibrium. We show that the difference in marginal costs of the two channels plays an important role in determining the existence of dual channels in equilibrium. We also show that demand variability has a major influence on the equilibrium prices and on the manufacturer’s motivation for opening a direct channel. In the case that the manufacturer and the retailer coordinate and follow a centralized decision maker, we show that adding a direct channel will increase the overall profit. Our numerical results show that an increase in retailer’s service quality may increase the manufacturer’s profit in dual channel and a larger range of consumer service sensitivity may benefit both parties in the dual channel. Our results suggest that the manufacturer is likely to be better off in the dual channel than in the single channel when the retailer’s marginal cost is high and the wholesale price, consumer valuation and the demand variability are low.     

A note on channel performance under consignment contract with revenue sharing

Wang et al. [Y. Wang, L. Jiang, Z.J. Shen, Channel performance under consignment contract with revenue sharing. Management Science 50 (2004), 34–47] indicate that a decentralized supply chain cannot be perfectly coordinated. This note provides a cooperative game model that implements profit sharing between the manufacturer and the retailer to achieve their cooperation. When the manufacturer and the retailer are assumed to be risk-neutral, under a very mild restriction on the demand distribution function, the cooperative game model can achieve its unique equilibrium solution in iso-price-elastic or linear demand case. Under the revenue sharing agreement attached with the equilibrium payment scheme, the decentralized supply chain can be perfectly coordinated.     

Strategic capability investments and competition for supply contracts

Suppliers often make proactive investments to strategically position themselves to win contracts with a large buyer. Such investments reduce the suppliers’ variable costs of serving the buyer’s demand. We show that an auction mechanism does not always benefit the buyer, the supply chain, or the society. We identify scenarios where the buyer can implement the supply chain and socially optimal solution by committing to a bilateral relationship with fair reimbursement, and forgoing the benefits of competition altogether. We explore the role of commitment by the buyer (to a procurement mechanism) and by the suppliers (to an investment level) by analyzing different timing games under symmetric and asymmetric information about suppliers’ types. We show that it never benefits anyone for the suppliers to commit first. Equilibrium investments and cost structures depend upon the buyer’s bargaining power (opportunity cost). However, the winning supplier’s investments are almost always below the supply chain optimal level.     

Coordination of supply chains with bidirectional option contracts

In this paper we develop a supply contract for a two-echelon manufacturer–retailer supply chain with a bidirectional option, which may be exercised as either a call option or a put option. Under the bidirectional option contract, we derive closed-form expressions for the retailer’s optimal order strategies, including the initial order strategy and the option purchasing strategy, with a general demand distribution. We also analytically examine the feedback effects of the bidirectional option on the retailer’s initial order strategy. In addition, taking a chain-wide perspective, we explore how the bidirectional option contract should be set to attain supply chain coordination.     

Monotonicity properties of wholesale price contracts

This paper contributes to the supply chain contracts literature in economics and operations by performing qualitative sensitivity analysis of a wholesale price contract in a two-echelon supply chain setting. Order-theory tools are used to derive sufficient conditions for monotonicity of contract parameters.The upstream supplier is modeled as a Stackelberg leader. The supplier is assumed to have complete information about the costs and revenue function of the downstream retailer. It is shown that an equilibrium wholesale price weakly increases with an increase in the supplier production cost rate, but it may increase or decrease with an increase in the retailer cost rate. As either the supplier production cost or the retailer cost increases, the supplier profit decreases weakly. Additional sensitivity analysis is performed assuming certain properties of the retailer revenue function.Several well-known results in the supply chain contracting literature can be considered as special cases of the more general theorems developed here. In particular, this paper reexamines the analysis of a newsvendor supply chain problem by Lariviere and Porteus [Lariviere, M.A., Porteus, E.L., 2001. Selling to the newsvendor: An analysis of price-only contracts. Manufacturing & Service Operations Management 3, 293–305]. This paper generalizes and extends their work, by establishing properties of the newsvendor demand distribution that guarantee monotonicity of the contract parameters, without requiring a unique contract solution.     

Vendor Management Inventory with consignment contracts and the benefits of cooperative advertising

Most of the cooperative advertising literature has focused on studying the effects of such programs considering marketing variables. This paper integrates production and inventory management with pricing and advertising considerations to assess the effects of cooperative advertising programs in bilateral monopolies. We consider a supply chain where a Vendor Managed Inventory (VMI) along with a consignment contract is implemented to coordinate the chain. We develop and solve a differential model for two games. The first one is a benchmark scenario where no cooperative advertising is offered, while the manufacturer offers the cooperative program in the second game. The main results show that cooperative advertising programs, usually considered as successful marketing initiatives, can be very difficult to implement in a supply chain undertaking a VMI policy with a consignment contract, in which operations and marketing interface is taken into account. A cooperative program mainly hurts the manufacturer’s profits, and can be profit-Pareto-improving only in a few cases. Although the retailer is generally willing to receive a support from the manufacturer, she can opt for a non-cooperative program when the largest part of the supply chain profits goes to the manufacturer. We developed several special cases to strengthen our findings.     

On the role of revenue-sharing contracts in supply chains

The supply chain coordinating role of revenue-sharing has, to date, been examined only in static models. With downstream competition, the central conclusion in these models is negative: revenue-sharing cannot, except in degenerate form, achieve coordination. Incorporating dynamics, by allowing inventory carryover in discrete time, this paper establishes a foundation for revenue-sharing contracts in aligning incentives.     

Marketing-driven channel coordination with revenue-sharing contracts under price promotion to end-customers

This paper explores the equilibrium behavior of a basic supplier-retailer distribution channel with and without revenue-sharing contracts under price promotion to end-customers. Three types of promotional demand patterns characterized by different features of dynamic price sensitivity are considered to rationalize price promotional effects on end-customer demands. Under such a retail price promotion scheme, this work develops a basic model to investigate decentralized channel members’ equilibrium decisions in pricing and logistics operations using a two-stage Stackelberg game approach. Extending from the basic model, this work further derives the equilibrium solutions of the dyadic members under channel coordination with revenue-sharing contracts. Analytical results show that under certain conditions both the supplier and retailer can gain more profits through revenue-sharing contracts by means of appropriate promotional pricing strategies. Moreover, the supplier should provide additional economic incentives to the retailer. Furthermore, a counter-profit revenue-sharing chain effect is found in the illustrative examples. Such a phenomenon infers that the more the retailer requests to share from a unit of sale the more it may lose under the revenue-sharing supply chain coordination scheme.