Price Coordination Research Articles

Explicit price method for coordinated control and hydro-power production example

In the context of a general renewed interest in decomposition-coordination control approaches, and in the more particular continuity of former studies of the authors in that respect, the present paper focuses on some so-called price coordination method based on distributed receding horizon controllers, here emphasizing possible explicit schemes both at the controllers level and at the coordinator level. This can clearly be of interest for the control of large scale systems as they arise in power management issues, and is illustrated with an example of hydro-power application. In short, the coordinator computes a price vector and distributes it to the various subsystems composing the overall system to be controlled, on the basis of the predicted control strategies that each of them communicate to it. The main point is that the coordinator here takes advantage of the explicit solutions for local linear Receding Horizon Controls, to globally update those price values in an explicit way as well. This method is illustrated with simulations of an industrial Hydro-Power Valley case-study, using real-data from French main electricity provider EDF (Electricité de France), and a comparison with the more classical coordination scheme based on a gradient algorithm is presented.

Trade and Transfer Pricing

Although there may be difficulties, especially during challenging economic times, in applying profit-based regulations when an income tax dimension is considered, if a trade dimension is introduced, in some circumstances profit-based methods, such as the comparable profits method (CPM) or transactional net marginal method (TNMM), may be preferred transfer pricing methods for multinationals. The article provides a comprehensive overview of the profit-based methods CPM and TNMM, where advantages and disadvantages of these methods are considered, and differences between these two methods are pointed out. The article also introduces a conceptual framework for transfer price coordination in the context of income tax and customs laws and examines issues pertaining to harmonization of income tax and customs laws.

Price leadership and coordination in retail gasoline markets with price cycles

This study examines the coordination mechanism used by gasoline stations in the midwestern United States where prices exhibit highly cyclical fluctuations known as Edgeworth cycles. Stations in these markets repeatedly coordinate large marketwide price increases following periods of aggressive price undercutting. By studying these periodic price jumps both over time and across cities, I find that a particular retail chain in each city acts as a price leader initiating each price restoration. The leader signals the new price level to competitors by simultaneously jumping prices at all its stations to a single price. Competitors follow quickly with a large majority of stations jumping to the exact same price within a 24 hour period. The characteristics of the leading firms and the nature of observed price coordination suggest that successful price jumps may be facilitated by the existence of a retailer controlling the prices of a significant number of stations in a city. Identifying the important role of these firms in the market contributes to a broader understanding of price leadership and coordination and highlights another potential reason why price cycles exist in some in retail gasoline markets and not others.

Developing a two stage stochastic programming model of the price and lead-time decision problem in the multi-class make-to-order firm

Pricing coordination and due-date management are managerial challenges in today’s competitive marketplace. Segmenting orders into classes and allocating resources based on their sensitivity to time and price can increase a firm’s profit and its capacity utilization. In addition, other parameters such as production policy, inventory holding and delivery system should be considered in pricing and due-date decisions. In this paper, we consider the role of flexibility in price, lead-time and delivery in the make-to-order environment, where limited production capacity under a stochastic demand function is allowed. We develop a two-stage stochastic programming model to determine the price, lead-time and production amount jointly in each period. The difficulty of continuous distributions is avoided by using a scenario-based approach for stochastic demand. Through numerical analyses, we indicate the benefits of flexibility in delivery, price and lead-time in various environments.

Column Generation based Primal Heuristics

In the past decade, significant progress has been achieved in developing generic primal heuristics that made their way into commercial mixed integer programming (MIP) solver. Extensions to the context of a column generation solution approach are not straightforward. The Dantzig-Wolfe decomposition principle can indeed be exploited in greedy, local search, rounding or truncated exact methods. The price coordination mechanism can bring a global view that may be lacking in some “myopic” approaches based on a compact formulation. However, the dynamic generation of variables requires specific adaptation of heuristic paradigms. The column generation literature reports many application specific studies where primal heuristics are a key to success. There remains to extract generic methods that could be seen as black-box primal heuristics for use across applications. In this paper we review generic classes of column generation based primal heuristics. We then focus on a so-called “diving” method in which we introduce diversification based on Limited Discrepancy Search. While being a general purpose approach, the implementation of our heuristic illustrates the technicalities specific to column generation. The method is numerically tested on variants of the cutting stock and vehicle routing problems.

On the Role of Confidentiality and Deadlines in Bilateral Negotiations

The preference between public and private negotiations for a buyer who sequentially visits two suppliers is examined. It is shown that the buyer weakly prefers to conduct private negotiations in order to create strategic uncertainty about the trade history. With substitute goods, such uncertainty is valuable only when price offers have short expiries that prevent a head-to-head supplier competition. With complementary goods, strategic uncertainty is valuable to the extent that price coordination becomes a concern for suppliers, which is likely to be the case when suppliers possess relatively high bargaining powers; price offers have short expiries; and/or goods are weak complements. The effects of mandatory disclosure laws, extended return policies, and purchasing alliance formation on trade efficiency are also discussed.

The Coordination of Pricing and Scheduling Decisions

This paper considers the coordination of pricing and scheduling decisions in a make-to-order environment. Following common industry practice, we assume knowledge of a deterministic demand function that is nonincreasing in price. We consider three alternative measures of scheduling cost: total work-in-process inventory cost of orders, total penalty for orders delivered late to customers, and total capacity usage. The objective is to maximize the total net profit, i.e., revenue less scheduling cost, resulting from the pricing and scheduling decisions. We develop computationally efficient optimal algorithms for solving the three pricing and scheduling problems. Because these problems are formally intractable, much faster algorithms are not possible. We develop a fully polynomial time approximation scheme for each problem. We also estimate the value of coordinating pricing and production scheduling decisions by comparing solutions delivered by (a) an uncoordinated approach where pricing and scheduling decisions are made independently, (b) a partially coordinated approach that uses only general information about scheduling that a marketing department typically knows, (c) a simple heuristic approach for solving the coordinated problem, and (d) our optimal algorithm for solving the coordinated problem. Our main managerial insight is that there is a significant benefit even if pricing and scheduling are only heuristically or partially coordinated. Moreover, heuristic and partial coordination are simple to achieve.

Price coordination in a three-level supply chain with different channel structures using game-theoretic approach

Pricing is an important decision affecting the profitability of the supply chain system and individual channel members. It is important to coordinate pricing decisions for different channel members of the supply chain under different channel structures and power structures. Most studies to date have focused on price coordination in the traditional channel structure, mostly composed of two echelons. Little attention has been given to the multi-level channel. This paper studies price coordination problem in a three-level supply chain composed of a single supplier, a single manufacturer and a single retailer. Three types of channel structures are considered, namely, the decentralized, the semi-integrated, and the integrated. Two power structures are studied for the decentralized and the semi-integrated channels. The leader-follower power structure is modeled as a Stackelberg game, where the manufacturer always takes the leadership, while the independent power structure is treated as a simultaneous non-cooperative game (simply Nash game). We explore the effects of power structures, channel structures and market parameters on equilibrium prices and profits. The results show that the manufacturer or the integrated members had better take the channel leadership. We also find that the integration for the manufacturer and the retailer cannot always improve their profits in a monopoly. Besides, when product cost is larger than a certain level, the chain members’ profits will increase as the market becomes more sensitive to the retail price.

Price Coordination in Two-Sided Markets: Competition in the TV Industry

The TV industry is a two-sided market where both advertisers and viewers buy access to the programs offered by competing TV channels. Under the current market structure advertising prices are typically set by TV channels while viewer prices are set by distributors (e.g. cable operators). The latter implies that the distributors partly internalize the competition between the TV channels, since they take into account the fact that a lower viewer price at one channel will harm rival channels. We nonetheless find that a shift to a market structure where both advertising prices and viewer prices are set competitively by the TV channels might increase joint industry profits. The reason is that this market structure, in contrast to the one we observe today, directly addresses the two-sidedness of the market. We also show that this is to the benefit for the viewers.

Basic Knowledge for Market Principle: Approaches to the Price Coordination Mechanism by Using Optimization Theory and Algorithm

On the basis of market fundamentalism, new types of social systems with the market mechanism such as electricity trading markets and carbon dioxide (CO2) emission trading markets have been developed. However, there are few textbooks in science and technology which present the explanation that Lagrange multipliers can be interpreted as market prices. This tutorial paper explains that (1) the steepest descent method for dual problems in optimization, and (2) Gauss-Seidel method for solving the stationary conditions of Lagrange problems with market principles, can formulate the mechanism of market pricing, which works even in the information-oriented modern society. The authors expect readers to acquire basic knowledge on optimization theory and algorithms related to economics and to utilize them for designing the mechanism of more complicated markets.

Coordination of pricing and inventory control across products

AbstractWe consider the joint pricing and inventory‐control problem for a retailer who orders, stocks, and sells two products. Cross‐price effects exist between the two products, which means that the demand of each product depends on the prices of both products. We derive the optimal pricing and inventory‐control policy and show that this policy differs from the base‐stock list‐price policy, which is optimal for the one‐product problem. We find that the retailer can significantly improve profits by managing the two products jointly as opposed to independently, especially when the cross‐price demand elasticity is high. We also find that the retailer can considerably improve profits by using dynamic pricing as opposed to static pricing, especially when the demand is nonstationary. © 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2009

Pricing and order coordination of two-echelon supply chain under duopolistic retailer's competition

This paper examines the pricing and order coordination decisions in a two-echelon supply chain with one manufacturer who supplies a single product to duopolistic retailers, whose demands interact with the assumption of being price-sensitive. The problem is analysed under the Stackelberg structure, in which the manufacturer acting as a leader declares her wholesale price and a Common-Replenishment-Epochs (CRE) schedule to competitive retailers, and the duopolistic retailers acting as followers respond with their sales prices and associated order policies. By theoretical analysis and numerical example, we find that CRE strategy not only induce lower retail price and higher total demand, but also change the market sharing among duopolistic retailers. The effects of change of several parameters on the optimal decisions are also analysed.

Who's Got the Coupon? Estimating Consumer Preferences and Coupon Usage from Aggregate Information

Most researchers in marketing have typically relied on disaggregate data (e.g., consumer panels) to estimate the behavioral and managerial implications of coupon promotions. In this article, the authors propose the use of individual-level Bayesian methods for studying this problem when only aggregate data on consumer choices (market share) and coupon usage (number of distributed coupons and/or number of redeemed coupons) are available. The methodology is based on augmenting the aggregate data with unobserved (simulated) sequences of choices and coupon usage consistent with the aggregate data. The authors analyze various marketing scenarios that differ in terms of their assumptions about consumer choices, coupon availability, and coupon redemption. They illustrate the proposed methods using both simulated data and a real data set for which an extensive set of posterior predictive checks helps validate the aggregate-level estimation. In addition, the authors relate the empirical results to some of the findings in the literature about the coordination of coupon promotions and pricing and show how the methodology can be used to evaluate alternative coupon targeting policies.

Market coupling and the importance of price coordination between power exchanges

In Europe, market coupling stands for a further integration of wholesale trading arrangements across country borders. More specifically, it refers to the implicit auctioning of cross-border physical transmission rights via the hourly auctions for electric energy organized by power exchanges (PEXs) one day ahead of delivery. It therefore implies that the PEXs can optimize the clearing of their day-ahead auctions. Due to verticals in the aggregated order curves, the optimal solution can be settled at different prices. In order for prices to give correct locational signals for network development, generation and consumption, price coordination between exchanges is necessary. The paper illustrates this issue, its relevance and discusses how to deal with it.

Spatial Price Dynamics in U.S. Regional Broiler Markets

The U.S. broiler industry is highly vertically integrated and increasingly concentrated in the number of firms and production areas. These structural elements could have implications for performance and the functioning of the law of one price (LOP) across regions. This article investigates this using data on four regional markets. Cointegration results indicate that regional prices are spatially linked in the long run, but pairwise cointegration was not found, suggesting that the LOP does not hold. Causality tests confirm the relative importance of price shocks from the South. This finding is reflective of price coordination by firms with production in multiple regions.

HIERARCHICAL SOLUTION OF THE OPTIMUM ALLOCATION PROBLEM LAGRANGIAN RELAXATION AND EXPLICIT SOLUTION PRINCIPLES

Recently, there have been many problems describing the technological, societal and environmental processes, very complex, large in dimension, with many inputs and outputs. These problems can be optimized by classical theories but often such methods based on centrality cannot be applied because of huge amount of information. Then, hierarchical approaches seem to be a convenient tool for the optimization problems. This contribution describes the hierarchical solution of optimum load allocation problem in thermal power plant. Two iterative and one explicit method based on the price coordination and interaction balance are derived and applied.

Pricing Coordination Failures and Health Care Provider Integration

The rise of managed healthcare organizations (MCOs) and the associated increased integration among providers has transformed US healthcare and at the same time raised antitrust concern. This paper examines how competition among MCOs affects the efficiency gains of improved price coordination achieved through integration. MCOs offer differentiated services and contract with specialized and complementary upstream providers to supply these services. We identify strategic pricing equilibria under three different market structures: overlapping upstream physician-hospital alliances, upstream-downstream arrangements such as Preferred Provider Organizations, and vertically integrated Health Maintenance Organizations. The efficiency gains achieved depend not only on organizational form but also on the toughness of premium competition. We show that, contrary to popular thinking, providers and insurers do not earn maximum net revenue when they are monopolies or monopsonies, but rather at an intermediate level of market power. Furthermore, closer integration of upstream and downstream providers does not necessarily increase net revenues.

A Game Theoretical Approach of Price Negotiation and Coordination in an Innovative Firm-Supplier Context: An Experimental Analysis

AbstractThis article analyzes a sequential interaction between a firm and its supplier, involving negotiation in the first round and coordination between two different production activities in the second round. The evolution of the vertical relations in the manufacturing sectors reveals that the performance of the firms increasingly depends on these two dimensions. Price negotiation determines the share of the profits of the two actors, while coordination determines the performance of the overall chain. To model this sequential interaction between the supplier and the firm, we use the tools and concepts of game theory. While game theory usually considers the coordination problem as an isolated phenomenon, the originality of our work is that it examines the problem of in a context where coordination between agents is preceded by a negotiation phase. The model emphasizes the influence of the price negotiation on the coordination round. Several theoretical predictions are proposed, derived not only from the strict assumptions of game theory, but also from assumptions which relax those of game theory. These predictions are then experimentally tested. The results do not confirm the predictions of game theory. In fact, they are consistent with the predictions put forth as alternatives to the predictions of game theory. They show i) a propensity to maximize the performance of the chain, and ii) a propensity to arrive at an equitable share of the joint profit in the chain. Finally, though the experiment was not designed to study cross-cultural or international cases, the results suggest new research directions in this area.

The Market for Intellectual Property: The Case of Complementary Oligopoly

This paper applies a model of complementary oligopoly and anticommons pricing to the market for intellectual property rights. Our model demonstrates a surprising and interesting overlooked result: In the market for complementary goods, price coordination and monopolistic pricing do not necessarily represent inefficient equilibria, when compared to the alternative Nash equilibrium. Due to the peculiar cross-price effects in the supply of complementary goods, price coordination and monopolistic supply often constitute an improvement over the alternative equilibrium outcomes. To be precise, the welfare effects of competition and price coordination depend on the nature of the intellectual product concerned. This has significant and obvious implications for the economic analysis of copyright collectivization, as well as for antitrust regulation in this area.

Pay More Tribute to Smart Ants: A Note on the Tullockian Environmental Coordination in Non–Human Societies

We show in this short note that the thesis in Tullock (1994) about how the environment coordinates the division of labor in non-human societies can be formulated by the fixed-point argument. As such, both what maybe called the Tullockian environmental coordination and the conventional Walrasian pricing coordination in economics turn out to be special cases of a more general principle, into which further exploration remains to be made.