Controlling Power Retailer's Gray Activities Through Contract Design
Article first published online: 7 JUN 2011
© 2011 Production and Operations Management Society
Production and Operations Management
Volume 21, Issue 1, pages 145–160, January-February 2012
How to Cite
Su, X. and Mukhopadhyay, S. K. (2012), Controlling Power Retailer's Gray Activities Through Contract Design. Production and Operations Management, 21: 145–160. doi: 10.1111/j.1937-5956.2011.01245.x
- Issue published online: 5 JAN 2012
- Article first published online: 7 JUN 2011
- History: Received: March 2010; Accepted: January 2011 by Suresh Pal Sethi, after 1 revision.
- supply chain;
- contract design;
- gray market
We develop a model that captures dynamic relationships of a supply chain populated by a dominant retailer and a number of fringe retailers. The two types of retailers are asymmetric in buying power, retailing cost, and the ability to service the manufacturer's product. The wholesale prices offered through a quantity discount (QD) schedule can coordinate such a supply chain, but invite channel flow diversion type of gray trading between the dominant retailer and the fringe retailers. Our analysis is focused on how such a channel can be coordinated and the gray market activities be prevented. We propose a dynamic QD contract or a revenue-sharing contract that the manufacturer can use to fight the gray market activity. The performance of the supply chain and the manufacturer's profit under each of the two contract forms are compared and managerial guidelines are provided to help the manufacturer make a judicious choice.