Optimal bargaining timing of a wholesale price for a manufacturer with a retailer in a dual-channel supply chain

Kenji Matsui

doi:10.1016/j.ejor.2020.05.004

Abstract

This paper explores the optimal timing of when a manufacturer should bargain a wholesale price with a retailer in a dual-channel supply chain that consists of the manufacturer and the retailer. To address the problem, we construct a game-theoretic model in which the manufacturer can sell products directly to consumers (direct channel) and through the retailer (retail channel). We also assume that the manufacturer determines the direct price in the direct channel and the retailer determines the retail price in the retail channel, while the manufacturer and the retailer bargain the wholesale price. The analytical solution of our model yields the following clear-cut result: the manufacturer achieves its highest profit by bargaining the wholesale price earlier than determining the direct price. Moreover, we show that this result holds even if the control variables determined by the two supply chain members at the retail market level are not prices but quantities, proving the robustness of the result. Consequently, the result provides the managerial implication usable for practical decision-making that if a manufacturer using a dual-channel supply chain can choose the timing to negotiate the wholesale price with a retailer, the manufacturer should have the opportunity before determining the direct price or the quantity of products sold directly to consumers.

Highlights

The rapid advancement of information and communication technology in recent decades has induced manufacturers to redesign their sales and supply chain distribution strategies
We assume that the manufacturer determines the direct price in the direct channel and the retailer determines the retail price in the retail channel, while the manufacturer and the retailer bargain the wholesale price
The result provides the managerial implication usable for practical decision-making that if a manufacturer using a dual-channel supply chain can choose the timing to negotiate the wholesale price with a retailer, the manufacturer should have the opportunity before determining the direct price or the quantity of products sold directly to consumers

Summary

Introduction

The rapid advancement of information and communication technology in recent decades has induced manufacturers to redesign their sales and supply chain distribution strategies. In the late 2000s, when sales of PCs through direct channels became more prevalent, it became easier for Dell to obtain advantageous wholesale terms from retailers and to launch retail channel sales because the retailers were threatened by the increasing share of manufacturers’ direct sales This case indicates that determining the timing for negotiating wholesale terms and conditions with a retailer is a crucial problem for a manufacturer using a dual-channel supply chain. In November 2014, Hachette and Amazon reached an agreement that the publisher would retain control over price setting for its e-books, but that it would be offered financial incentives from Amazon to reduce prices This case suggests that the bargaining process and timing of wholesale terms with a large-scale reseller is an important practical problem for book publishers with dual channels..

Literature review

Basic results

Alternative scenario

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