Channel Profit Research Articles

Reverse channel choice in a closed-loop supply chain with new and differentiated remanufactured goods

ABSTRACTThis study deals with the problem of manufacturer’s choice of alternative reverse channel structures for collecting end-of-use products from consumers. We consider a two-echelon supply chain with one manufacturer and one retailer, based on which three reverse channel formats are proposed: an integrated model, manufacturer collection model, and retailer collection model. The main reason behind developing the models is to investigate how the wholesale price, the retail price, the collection rate, and the total channel profits are affected by the choice of the reverse channel structure. The three models are formulated as supply-constrained multi-variated optimization models and solved by using Lagrangian relaxation scheme. Our research findings suggest that the manufacturer tends to choose the direct collection system for a lower remanufacturing cost and a higher discount valuation of the remanufactured goods and to choose the indirect collection system for a lower collecting cost by the retailer.

Managing Channel Profits When Retailers Have Profitable Outside Options

The channel-coordination literature typically focuses on how a supplier can overcome channel inefficiencies stemming from misaligned pricing incentives. In contrast, we show that when an incumbent supplier faces competition from other suppliers to supply the downstream firms, it may want to create inefficiencies. Our analysis offers useful prescriptions for how incumbent suppliers should react to competitive threats by smaller competitors, how manufacturers should react to powerful retailers who can produce their own private-label brands, and how upstream firms should optimally treat downstream firms who may have different marginal costs of distribution. Our analysis also explains why wholesale prices and thus final-goods prices would be expected to decrease when there is an increase in upstream or downstream competition. This paper was accepted by J. Miguel Villas-Boas, marketing.

Cooperative game approaches to coordinating a three-echelon closed-loop supply chain with fairness concerns

This paper investigates a three-echelon closed-loop supply chain (CLSC) consisting of a manufacturer, a distributor, and a retailer, where the retailer exhibits fairness concerns. Cooperative and non-cooperative game theoretic analyses are employed to characterize interactions among different parties. Analytical results confirm the conventional wisdom: with the retailer's fairness concerns, the channel profits under the decentralized and partial-coalition models underperform that under the centralized model. To find an appropriate profit allocation scheme to coordinate the supply chain system with fairness concerns, we resort to the cooperative game theory. To this end, we first derive the characteristic function form of the cooperative game based on the equilibrium profits under centralized, decentralized and different partial-coalition models. Subsequently, we propose three coordination mechanisms based on the Shapley value, nucleolus solution, and equal satisfaction to allocate surplus profit. The three mechanisms are then evaluated by using numerical experiments. We further examine how the retailer's fairness concerns affect profit allocation under the three mechanisms. The key innovation is to incorporate the retailer's fairness concerns into the coordination of a three-echelon CLSC. Our contributions are twofold: First, cooperative game-theoretic mechanisms are put forward to coordinate the three-echelon CLSC with a fairness-minded retailer. Second, we investigate how the retailer's fairness concerns affect the CLSC members' pricing decision and surplus profit allocation. Our studies confirm that the resulting profit allocation schemes satisfy both individual and collective rationality and fall in the core of the cooperative game, thereby making the grand coalition stable and suggesting viable options to coordinate the CLSC system. Further analyses reveal that different coordination mechanisms benefit the three CLSC members differently. These research findings help CLSC managers to understand what options are available and identify possible pathways for them to foster cooperation and achieve equitable allocation of surplus profit.

Pricing decisions in a socially responsible supply chain under carbon cap-and-trade regulation

Abstract This article investigates a socially responsible supply chain under the cap-and-trade mechanism. Stylized centralized and decentralized models are established to characterize corporate social responsibility (CSR) in this supply chain. Analytical results reveal that the centralized case always achieves a higher socially responsible channel profit than the two decentralized models, but whether the centralized case achieves a higher pure channel profit than the decentralized scenarios depends on how heavier the weight is placed on CSR: when the weight is modest, the centralized model attains a higher pure channel profit, while a heavier weight on CSR leads to a higher pure channel profit for the two decentralized cases. We further examine how the CSR concern level and a government-set carbon cap-and-trade policy affect the operations of this socially responsible supply chain.

Price Coordination in Closed-loop Data Supply Chain

By focusing on new features of data products and, based on game theoretical models, we study three pricing mechanisms' performance and their effects on the participants in the data industry from the data supply chain perspective. A win-win pricing strategy for the players in the data supply chain is proposed. We obtain analytical solutions in each pricing mechanism, including the decentralised and centralised pricing, Nash bargaining pricing, and revenue sharing mechanism. Our findings show that: 1) the decentralised pricing has the lowest performance; 2) although Nash bargaining pricing can achieve the centralised channel performance, the upstream data provider and downstream application provider can only equally divide the total channel profit; 3) revenue sharing mechanism, in which the data provider subsidises the application provider, can achieve the first best performance and divide the maximum profit arbitrarily. Accordingly, end-users benefit mostly from the bargaining pricing and revenue sharing.

Informative advertising in a distribution channel

In this paper, we study how channel structure (decentralized vs centralized) and specified allocation of product advertising authority affect final advertising content and profits when consumers face uncertainty about both product match and retail price, and must incur a sunk cost to visit the retail store before making a purchase. We develop a game-theoretic framework in which a manufacturer and a retailer are defined as leader and follower, respectively, to model the strategic interactions and the optimal advertising and pricing decisions of channel members. In this context, we find that channel decentralization may lead to greater advertising content. Moreover, we find that if the manufacturer has product advertising authority additional to the retailer’s product advertising authority, then both the product advertising provision and the price advertising provision can be greater. This additional product advertising authority can lead to the manufacturer’s higher but the retailer’s lower profit with increased overall channel profits. However, if the manufacturer has exclusive product advertising authority, as compared to the case in which both channel members can advertise product, the manufacturer’s exclusive product advertising authority can lead to a decreased product advertising provision as well as a decreased price advertising provision; and it may even hurt the manufacturer while benefiting the retailer. We also find that a shift of exclusive product advertising authority from the retailer to the manufacturer leads to a product advertising provision that is such that more consumers will visit the store and purchase the product, which benefits the overall channel for a large parameter range.

Optimization and coordination of supply chains under the retailer's profit margin constraint

Abstract Using the context of a single-supplier single-retailer supply chain, this paper investigates the supplier’s optimal decision under the retailer's profit margin constraint and the effect of that constraint on supply chain coordination. We focus on the wholesale-price contracts and the revenue-sharing contracts under this supply chain structure. We first prove that under wholesale-price contracts, the function of the supplier’s expected profit is pseudo-concave with respect to wholesale price, and we thereby derive the supplier’s optimal wholesale price under the retailer’s profit margin constraint. We also reveal that although the action of a retailer pursuing a desired profit margin can alleviate channel profit loss with wholesale-price contracts, it also results in the supplier receiving lower profits. Furthermore, to improve the channel profit, we introduce revenue-sharing contracts under the retailer's profit margin constraint and derive the optimal wholesale price and the optimal revenue sharing coefficient, which not only meets the retailer’s profit margin constraint but also achieves supply chain coordination. Especially, according to the retailer’s profit margin constraint, the revenue-sharing contracts can allocate the optimal channel profit between the retailer and the supplier.

CHANNEL PERFORMANCE UNDER VENDOR MANAGED CONSIGNMENT INVENTORY CONTRACT WITH ADDITIVE STOCHASTIC DEMAND

Abstract Consignment as the shifting of the inventory ownership to a supplier is widely implemented in virtual market. In this form of business arrangement the supplier places goods at a retailer’s location without receiving payment, until the goods are sold. We consider a single period supply chain model, where the supplier contracts with the retailer with some probability of return. Market demand is additive, linearly price– dependent and uncertain. We focus on vendor managed consignment inventory (VMCI) channel, in which the supplier decides the consignment price and his service level and the retailer chooses the retail price. We study channel performance under VMCI setting by analysing how the model parameters influence decision quantities, channel profit and risk function. We also illustrate the obtained results by a numerical example, which explains the overall solutions well.

A collaborative model for coordination of monopolistic manufacturer's promotional efforts and competing duopolistic retailers' trade credits

In recent years, competition among enterprises has been significantly increased. Trade credit and promotional effort are two important tools that have been extensively used for increasing competitive advantage. In today's business environment, retailers compete each other on new factors such as the length of credit period offered to end customers. In this paper, the performance of a supply chain (SC) consisting of a monopolistic manufacturer and two competing retailers has been analyzed under a promotional-effort credit-period dependent demand. The promotional efforts made by the manufacturer and the trade credits offered by competing retailers stimulate the market demand. The investigated SC is modeled under the decentralized, centralized and coordinated decision-making structures. In the decentralized model, three game structures are proposed to reflect the retailers' behaviors according to their market dominance: (1) retailers' Cournot behavior, (2) retailers' Collusion behavior, and (3) retailers' Stackelberg behavior. In the centralized model, the optimal decisions on promotional efforts and credit periods are determined to maximize the profits of the entire channel. However, the results indicate that the centralized solution will not necessarily be acceptable to all members as it does not consider the individual profit of each SC member. To remedy shortcomings of the centralized model and coordinate the channel, a novel collaborative model is proposed in order to not only increase the whole SC profits, but also guarantee participation of all SC members. Finally, a numerical example along with a comprehensive sensitivity analysis is carried out to compare the performance of the proposed models.

Co-opetition under Endogenous Bargaining Power

Motivated by partial vertical integration practices, this paper investigates how a monopoly allocates a key input between the monopoly and his alliance(s) with complementary partner(s) for the delivery of final product or service. The firms' bargaining powers are endogenously impacted by the monopoly's key input allocation and the monopoly and partner(s) have inherently different cost-efficiencies in supplying complementary input. We show that the endogenous bargaining power delivers a fundamental trade-off between a partner's bargaining power and her cost advantage in the monopoly's input allocation decisions. The monopoly may strategically allocate partial key input internally for his own product/service delivery even when the monopoly's and the alliance(s)' products/services are perfect substitutes and the monopoly has a cost disadvantage. In a single partner setting, the firms' equilibrium input allocations are independent of their complementary input costs. Surprisingly, in a two-partner setting, the monopoly may allocate more key input internally for his own delivery of the final product or service as he becomes less cost-efficient; and symmetric allocation for cost-asymmetric partners and asymmetric allocation for cost-symmetric partners may exist. Our main insights extend to settings with alternative timelines, a general channel profit function, alternative bargaining power functions, and alternative outside options. Our study provides a strategic perspective for the coexistence of both cooperative and competing relationships between the monopoly and the partner(s).

Price Coordination in Closed-Loop Data Supply Chain

In this paper, we study pricing mechanisms’ performance and their effects on the participants in the data industry. We obtain analytical solutions in three pricing mechanisms, including the decentralized and centralized pricing, Nash Bargaining pricing, and revenue sharing mechanism. Our first result show that the decentralized pricing has the lowest performance. We also find that revenue sharing mechanism can achieve the first best performance and divide the maximum profit arbitrarily. Nash Bargaining pricing can achieve the centralized channel performance, the upstream data provider and downstream application provider can only equally divide the total channel profit.

Uncertain multi-item supply chain with two level trade credit under promotional cost sharing

Abstract In this paper, we have extended the Tsao’s (2010) and Huang et al.’s (2012) investigations incorporating higher level of trade credit and imprecise constraints on resources after correcting the mistakes in their formulations. Here, the multi-item two level supply chain model is formulated without/with budget constraint of the retailer. Customers’ credit period is introduced to boost the base demand of the items. It is established that if the supplier shares a part of the promotional cost then the channel profit as well as the individual profits increase. It is also established that the customers’ credit period has sufficient significance in the supply chain. In their formulation Tsao as well as Huang et al. considered some holding costs for the supplier. But according to the model, the supplier does not hold any product, i.e., the supplier’s holding cost should be zero. Also the interest earned and the interest paid by the retailer and the supplier are not properly calculated in their study. In the present study, these mistakes are corrected. In addition, when the available budget of the retailer is uncertain in the sense of fuzzy or rough, the optimum profits of the said models are evaluated and presented. Models with imprecise constraints are transferred to equivalent crisp constraints following suitable techniques. Existence of the optimal solution of the unconstrained crisp model is established analytically. These models are solved by Generalized Reduced Gradient (GRG) method using LINGO 14.0 software and/or Particle Swarm Optimization (PSO) technique. The models with imprecise inventory costs involve imprecise objectives and in those cases marketing decisions are made using PSO in two approaches – Direct approach, i.e., no crisp equivalents of the imprecise objectives are used for solving the models and another is Expected value (of the objectives) optimization approach. The models are illustrated with some hypothetical numerical examples. Some managerial implementations are also derived.

Optimal Coordination Strategy of Regional Vertical Emission Abatement Collaboration in a Low-Carbon Environment

This study introduces a time factor into a low-carbon context, and supposes the contamination control state of local government and the ability of polluting enterprise to abate emissions as linear increasing functions in a regional low-carbon emission abatement cooperation chain. The local government effectuates and upholds the low-carbon development within the jurisdiction that is primarily seeking to transform regional economic development modes, while the polluting enterprise abates the amounts of emitted carbon in the entire period of product through simplifying production, facilitating decontamination, and adopting production technology, thus leading to less contamination. On that basis, we infer that the coordinated joint carbon reduction model and two decentralization contracts expound the dynamic coordination strategy for a regional cooperation chain in terms of vertical carbon abatement. Furthermore, feedback equilibrium strategies that are concerned with several diverse conditions are compared and analyzed. The main results show that a collaborative centralized contract is able to promote the regional low-carbon cooperation chain in order to achieve a win–win situation in both economic and environmental performance. Additionally, the optimal profits of the entire regional low-carbon cooperation channel under an integration scenario evidently outstrip that of two non-collaborative decentralization schemes. Eventually, the validity of the conclusions is verified with a case description and numerical simulation, and the sensitivity of the relevant parameters is analyzed in order to lay a theoretical foundation and thus facilitate the sustainable development of a regional low-carbon environment.

On the evaluation of commonality strategy in product line design: The effect of valuation change and distribution channel structure

This paper investigates a manufacturer's optimal decisions in relation to the adoption of the commonality strategy in a decentralized channel as opposed to a centralized channel. Our model, through valuation premium and discount, captures the possible changes in the perceived quality made by customers as a result of the use of common design in the high-quality and low-quality products. We show that commonality always help reduce the extent of quality distortion encountered by the low-valuation segment, regardless of the channel structure. We also show that the adoption of commonality strategy in a decentralized channel is able to reduce channel efficiency loss, which may lead to improvements in the channel profits even when there is no cost saving associated with the use of common components. The valuation premium and discount are influential on several important measure including optimal quality levels, channel profits, and consumer surplus. Furthermore, we point out an important issue on the coordination between the manufacturer and the retailer that must be addressed if the commonality strategy is to be implemented in a decentralized channel.

Pricing and Benefit of Decentralization for Competing Supply Chains With Fixed Costs

This paper develops two duopoly game models to explore price decisions and the channel benefit of decentralization for two supply chains, and investigates the channel structure decisions in the presence of fixed marketing and manufacturing costs. We give the price decisions and discuss price distortion. Under the downward decentralization model, our analysis reveals that first, symmetric decentralization improves supply chain profit only when the fixed marketing costs are high or product substitutability is high; second, decentralization improves channel profit, and symmetric decentralization (i.e., both manufacturers use decentralization) is an equilibrium if the fixed marketing (or unit production) costs are sufficiently high and the market scales are sufficiently small; and third, the presence of fixed marketing costs and asymmetry of supply chains support the existence of asymmetric equilibrium. Under the upward decentralization model, we find that symmetric outsourcing emerges when the fixed manufacturing cost or the unit production cost is low while both market scale and product substitutability are large in the supplier-led setting, the channel profit under downward decentralization is higher than that under symmetric outsourcing only if product substitutability is high, and the sourcing strategy largely depends on the specific game sequence.

Offline retailers expanding online to compete with manufacturers: Strategies and channel power

As traditional offline retailers complain about manufacturers' decision to compete with them by selling their products directly online, many are responding by starting their own online sales operations. This paper analytically examines when an offline retailer's expansion online is desirable and how it affects channel members' strategies and profits in a dual channel. We found that staying out of the online market when it is still not large enough or is extremely large could be a better alternative for an offline retailer. Otherwise, a retailer's online expansion cannibalizes offline sales, but increases the retailer's overall sales. It increases the retailer's channel power at the expense of the manufacturer, who continues however to have the lion's share of the channel profit. Depending on market conditions, the retailer may or may not set the same price across channels, while the manufacturer always sets a lower price than the retailer in the online channel. Finally, a price war across channels in a relatively large online market further reduces offline prices and can drive the retailer out of the offline market.

Coordinating Data Pricing in Closed-Loop Data Supply Chain with Data Value Uncertainty

By focusing on new features of data products and, based on game theoretical models, we study three pricing mechanisms’ performance and their effects on the participants in the data industry from the data supply chain perspective. A win-win pricing strategy for the players in the data supply chain is proposed. We obtain analytical solutions in each pricing mechanism, including the decentralized and centralized pricing, Nash Bargaining pricing, and revenue sharing mechanism. Our findings show that: (1) the decentralized pricing has the lowest performance; (2) although Nash Bargaining pricing can achieve the centralized channel performance, the upstream data provider and downstream application provider can only equally divide the total channel profit; (3) revenue sharing mechanism, in which the data provider subsidizes the application provider, can achieve the first best performance and divide the maximum profit arbitrarily. Accordingly, end-users benefit mostly from the bargaining pricing and revenue sharing.

Fuzzy Optimization for Multi-item Supply Chain with Trade Credit and Two-Level Price Discount Under Promotional Cost Sharing

Here, a multi-item two-level supply chain is considered where supplier offers a cash discount and a credit period to its retailer to boost the demand of the items. Due to this facility, retailer also offers a cash discount to its customers to increase the base demand of the items. Retailer also introduces some promotional costs to boost the base demand of the items. It is established theoretically that if the supplier shares a part of the promotional cost then the channel profit as well as the individual profit increase. It is also established that the cash discount given to the customers has sufficient significance in a supply chain. The supply chain model is also considered in imprecise environment when different inventory costs are fuzzy in nature. In this case, individual profits as well as channel profit become fuzzy in nature. As optimization of fuzzy objective is not well defined, following credibility measure of fuzzy event, an approach is followed for comparison of fuzzy objectives and a particle swarm optimization algorithm is used to find marketing decisions. In another approach graded mean integration values of the fuzzy objectives are optimized to find marketing decisions. Models are illustrated with numerical examples.

Bidding for Bidders? How the Format for Soliciting Supplier Participation in NYOP Auctions Impacts Channel Profit

In a name-your-own-price (NYOP) auction, consumers bid for a product or service. If a bid exceeds the concealed threshold price, the consumer receives the product at her bid price. This paper examines how to optimize the interactions between the NYOP retailer and service providers, while, at the same time, managing the bid acceptance rates in order to induce the desired consumer bidding behavior. Channel profit is impacted by how the retailer decides whether or not a given consumer bid will be accepted and, if so, which service provider is chosen to supply a unit of the product to the consumer. We devise a mechanism, the modified second-price auction, which maximizes channel profit. This paper was accepted by J. Miguel Villas-Boas, marketing.

Managing channel profit and total surplus in a closed-loop supply chain network

Today’s government is interested in the product recovery programme in order to encourage sustainability. The research develops four closed-loop supply chain models by considering different scenarios for the governmental subsidies and fees under price-sensitive demand. Analytical results suggest that the government should provide subsidies to the manufacturer to maximise channel profit and total surplus. Higher subsidies advocates a manufacturer’s intention to lean towards remanufacturing activities under given manufacturing and consumption fees scenarios. The sensitivity analysis reveals that the total surplus and channel profit increases as subsidies increase in all closed-loop supply chain models.