Vertically restrictive pricing in supply chains with price-dependent demand

  1. Yong Liu*,
  2. Michael J. Fry*,
  3. Amitabh S. Raturi*

Article first published online: 10 APR 2006

DOI: 10.1002/nav.20153

Issue

Naval Research Logistics (NRL)

Naval Research Logistics (NRL)

Volume 53, Issue 6, pages 485–501, September 2006

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How to Cite

Liu, Y., Fry, M. J. and Raturi, A. S. (2006), Vertically restrictive pricing in supply chains with price-dependent demand. Naval Research Logistics (NRL), 53: 485–501. doi: 10.1002/nav.20153

Author Information

  1. Department of Quantitative Analysis and Operations Management, College of Business, University of Cincinnati, Cincinnati, Ohio

*Department of Quantitative Analysis and Operations Management, College of Business, University of Cincinnati, Cincinnati, Ohio

Publication History

  1. Issue published online: 17 JUL 2006
  2. Article first published online: 10 APR 2006
  3. Manuscript Accepted: 17 FEB 2006
  4. Manuscript Revised: 8 JAN 2006
  5. Manuscript Received: 15 APR 2004

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Keywords:

  • supply chain;
  • price-dependent demand;
  • vertically restrictive pricing

Abstract

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. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006.

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