Channel coordination with a manufacturer controlling the price and the effect of competition

Abstract

This paper investigates two coordination mechanisms in a simple distribution channel: 1) the manufacturer's suggested retail price (MSRP) and 2) the minimum advertised price (MAP). With a MSRP, the retailer can engage in a price discount policy to maintain control of the selling price. With a MAP, the manufacturer pays part of the retailer's advertising expenses. Our results illustrate that when the consumer's price sensitivity is lower than their advertising sensitivity, both players prefer a MAP. Otherwise, the adoption of a MSRP is only profit-Pareto-improving when the retailer's transfer price is large. We contrast the findings with a distribution channel that adopts a classical wholesale price contract (WPC). When compared to a classical WPC, firms are indifferent between selecting a WPC or a MSRP, while they prefer a MAP to a WPC. We explore two competitive scenarios to investigate the impact of competition on the preferences among these contracts.