Lower Wholesale Price Research Articles

Pricing Policy in a Supply Chain: Negotiation or Posted Pricing

This article examines the choice of pricing policy (posted pricing or negotiation) toward end customers in a supply chain. Many retailers actively decide whether or not to encourage negotiation on the shop floor. Of course, the retailer's pricing policy influences not only the retailer's profit, but also the profits of the manufacturers who sell through the retailer. However, little is known about the forces that shape the pricing policy when two self‐interested parties interact in a supply chain. We consider two alternative models depending on who has the power to decide the pricing policy: the manufacturer or the retailer. We find that an increase in the wholesale price weakens the retailer's ability to price discriminate through negotiation. Therefore, the retailer prefers negotiation at lower wholesale prices and posted pricing at higher wholesale prices. We also find that whenever the retailer prefers negotiation, the manufacturer does too. Therefore, the retailer's discretion over the pricing policy causes friction only when the retailer wants to use posted pricing, while the manufacturer wishes the retailer to use negotiation. We show that such friction arises only when product availability or the cost of negotiation is moderate. In this case, we show that the manufacturer may offer a substantial discount to persuade the retailer to negotiate. Surprisingly, in this region of friction, a decrease in the supply chain's capacity or an increase in negotiation costs (both of which are typically considered as worsening the retailer's business environment) translates into higher profit for the retailer.

Discretionary disclosure in the presence of dual distribution channels

A prevailing view in the disclosure literature is that firms who learn favorable market information are reluctant to disclose it, fearing it will attract new rivals. In this paper, we demonstrate that the presence of dual distribution arrangements, wherein consumers can purchase products either from traditional retail firms or directly from suppliers, can notably alter disclosure incentives. As under prevailing views, a retailer disclosing positive news risks entry by competitors. However, entry shifts the incumbent supplier–retailer relationship: the presence of new competitors leads the supplier to treat its retailer more as a strategic partner, translating into lower wholesale prices. This, in turn, can lead the retailer to willingly share favorable news, since such disclosure invites entry precisely when the retailer stands to benefit most from price concessions. Our results suggest that as dual distribution continues to increase in prominence, firms may be more willing to voluntarily disclose sensitive financial information particularly that which points to high demand for its products.

Dollar vs. percentage markup pricing schemes under a dominant retailer

We investigate two very common pricing schemes for a Stackelberg-dominant retailer: percentage-markup and dollar-markup. We show that when a dominant retailer switches from dollar to percentage markup, the channel’s “overall pie” and the retailer’s “pie-piece” are both enlarged. In contrast, the manufacturer will be forced to levy a lower wholesale price, thus receiving a smaller pie-piece despite the larger pie. The preceding statements hold regardless of whether the demand is deterministic or stochastic. However, the effects of switching to percentage markup on the retail price and sales volume will depend not only on whether the demand is stochastic, but also on the assumed demand-curve shape and on whether demand stochasticity is “additive” or “multiplicative”. Besides presenting a comprehensive set of answers on the comparative performance of dollar- and percentagemarkups, our results also highlight the often overlooked importance of choosing between: (i) dollar- and percentage-markup; and (ii) the formats of the assumed stochasticity and demand curves.

Market-Share Contracts with Vertical Externalities

We construct a model of market-share contracts with vertical externalities. When a dominant supplier offers a linear wholesale price to a retailer, vertical externalities, well-recognized as double-marginalization problems, arise in the vertical relation. The dominant supplier facing vertical externalities charges a wholesale price that is excessively high for both the vertical relation and social welfare. Under market-share contracts, the retailer can commit to increase the sales of goods produced by the dominant supplier for a lower wholesale price. We point out that this induces the vertical relation to engage in market-share contracts even in the absence of exclusionary effects in the upstream market. We also show that such contracts mitigate vertical externalities and improve social welfare.

Markup pricing strategies between a dominant retailer and competitive manufacturers

Markup pricing contracts have been widely employed in many industries. Under such contracts, a retailer charges a retail margin over the wholesale price levied by the supplier to guarantee her financial prudence. In a setting where two competitive manufacturers sell substitutable products through a common dominant retailer, we investigate and compare performance of two different markup arrangements, namely, percentage and dollar, under the deterministic and stochastic demand situations, respectively. We find that, no matter what the demand characteristic is, when the retailer switches from dollar to percentage markup, the retailer makes a higher profit while the manufacturers suffer, because the switching forces manufacturers charge lower wholesale prices and thus leads to lower retail prices. Moreover, under the deterministic demand situation, the switching brings about a larger order quantity and a higher channel profit. Under the stochastic demand situation, however, the effect of the switching on order quantity and channel profit depends on manufacturer differentiation and retailer efficiency: order quantity (channel profit) becomes smaller (lower), as manufacturer differentiation becomes weaker or retailer efficiency becomes higher. And, the demand uncertainty intensifies the effect.

Asymmetric transmission between factory and wholesale prices in fiberboard market in Korea

Abstract This paper extends the estimation of price relationships in wood processing and empirical assessment of asymmetric price transmission by incorporating time lags in both explanatory and dependent variables. Each of the models developed and estimated in this article reveals the existence of asymmetric price transmission between factory and wholesale prices of fiberboard in Korea. Estimation results indicate that wholesalers earn additional profits by exploiting price fluctuations in the markets. The empirical findings in this study suggest the potential for lower wholesale prices of fiberboard with more competition in wholesale marketing.

Price Discrimination in Input Markets: Downstream Entry and Efficiency

The extant theory on price discrimination in input markets takes the structure of the downstream industry as exogenously given. This paper endogenizes the structure of the downstream industry and examines the effects of permitting third‐degree price discrimination on market structure and welfare. We identify situations where permitting price discrimination leads to either higher or lower wholesale prices for all downstream firms. These findings are driven by upstream profits being discontinuous due to costly entry. Moreover, permitting price discrimination fosters entry which often improves welfare. Nevertheless, entry can also reduce welfare because it may lead to a severe inefficiency in production.

Buyer Power and Vertically Differentiated Retailers

Abstract We consider a model of vertical competition where retailers purchase an upstream input from a monopolist and are able to differentiate from each other in terms of quality. Our primary focus is to study the price, quality and welfare effects of introducing a large retailer, such as Costco or a Wal-Mart Supercenter, which is able to obtain lower wholesale prices (i.e., countervailing buyer power). We obtain two main results. First, the store with no buyer power (a “traditional retailer”) responds to the presence of the large retailer by increasing its quality, a finding that is consistent with recent efforts by traditional retailers to enhance consumers’ shopping experience. Second, the presence of a large retailer causes consumer welfare to increase through two different channels: a) the upstream discount obtained by the large retailer is partially passed on to the retail price, and b) a greater quality offered by the traditional retailer. Contrary to conventional wisdom, at low levels of countervailing power, most of the consumer welfare gains accrue to consumers with the highest willingness to pay for quality, due to the latter channel.

Response of industrial customers to hourly pricing in Ontario’s deregulated electricity market

This paper uses hourly data from Ontario (Canada) between 2005 and 2008 to estimate the effects of real time wholesale electricity prices on demand by industrial customers. Nonlinear SUR estimates from Generalized Leontief (GL) specifications reveal elasticities of substitution from 0.02 to 0.07, confirming that industrial customers (connected to the transmission grid) shift consumption across peak and off-peak periods in order to reap benefits of lower prices. Estimates from FGLS and IV models suggest that this reduction in demand by industrial customers results in lower wholesale prices, which benefits all consumers. The policy lesson is that market based schemes that encourage Real Time Pricing (RTP) pricing should result in positive spillovers to all consumers.

Strategic Communication for Capacity Alignment with Pricing in a Supply Chain

We study a supply chain comprised of a retailer who sources a product from a manufacturer. The retailer has superior forecast information about market demand, and the manufacturer builds up capacity and sets the wholesale price prior to demand realization. We explore forecast information sharing between the retailer and the manufacturer by means of cheap talk. We show that meaningful forecast information can be shared truthfully only before the manufacturer sets both capacity and the wholesale price. By sharing demand forecast with the manufacturer, the retailer faces the tradeoffs between inflating the forecast in order to convince the manufacturer to increase capacity and deflating the forecast to persuade the manufacturer to offer a lower wholesale price. When the value of forecast information sharing is high, the tradeoffs are balanced, and incentives are aligned, leading to truthful information sharing. Moreover, we find that larger demand uncertainty can promote credible information sharing, and, surprisingly, can benefit both firms. Finally, we demonstrate that under general distributions, in equilibrium, firms share forecasts as a form of range/interval, which has been also implemented in practice.

Wholesale Price Determination Under the Threat of Demand-Side Substitution

An upstream supplier that is constrained both by downstream competition and the threat of demand-side substitution faces a tradeoff between maximizing joint-profit and extracting surplus. Although joint-profit maximization calls for relatively high marginal wholesale prices in order to dampen intra-brand competition, surplus extraction will be higher when the supplier instead charges relatively low marginal wholesale prices. The reason is that by inducing more intra-brand competition through lower wholesale prices, the supplier makes it less attractive for downstream firms to switch to alternative sources of supply. We show how this can make it optimal for the supplier to disadvantage more efficient and thus ultimately larger buyers, thereby smoothing out differences in their market shares. We further show that despite the use of non-linear supply contracts, marginal wholesale prices and thus final goods’ prices will decrease when either downstream competition intensifies or the supplier becomes more constrained by the threat of demand-side substitution.

Potential impacts assessment of plug-in electric vehicles on the Portuguese energy market

Electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs), which obtain their fuel from the grid by charging a battery, are set to be introduced into the mass market and expected to contribute to oil consumption reduction. In this research, scenarios for 2020 EVs penetration and charging profiles are studied integrated with different hypotheses for electricity production mix. The impacts in load profiles, spot electricity prices and emissions are obtained for the Portuguese case study. Simulations for year 2020, in a scenario of low hydro production and high prices, resulted in energy costs for EVs recharge of 20 cents/kWh, with 2 million EVs charging mainly at evening peak hours. On the other hand, in an off-peak recharge, a high hydro production and low wholesale prices' scenario, recharge costs could be reduced to 5.6 cents/kWh. In these extreme cases, EV's energy prices were between 0.9€ to 3.2€ per 100 km. Reductions in primary energy consumption, fossil fuels use and CO 2 emissions of up to 3%, 14% and 10%, respectively, were verified (for a 2 million EVs' penetration and a dry year's off-peak recharge scenario) from the transportation and electricity sectors together when compared with a BAU scenario without EVs.

Group Buying of Competing Retailers

Under group buying, quantity discounts are offered based on the buyers' aggregated purchasing quantity, instead of individual quantities. As the price decreases with the total quantity, buyers receive lower prices than they otherwise would be able to obtain individually. Previous studies on group buying focus on the benefit buyers receive in reduced acquisition costs or enhanced bargaining power. In this paper, we show that buyers can instead get hurt from such cooperation. Specifically, we consider a two‐level distribution channel with a single manufacturer and two retailers who compete for end customers. We show that, under linear demand curves, group buying is always preferable for symmetric (i.e., identical) retailers. For asymmetric retailers (i.e., differing in market base and/or efficiency), group buying is beneficial to the smaller (or less efficient) player. However, it can be detrimental to the larger (or more efficient) one. Despite the lower wholesale price under group buying, the manufacturer can receive a higher revenue. Interestingly, group buying is more likely to form when retailers are competitive in different dimensions. These insights are shown to be robust under general nonlinear demand curves, except for constant elastic demand with low demand elasticity.

Can Naked Exclusion Be Procompetitive?

Antitrust scholars have argued that exclusive contracts have anticompetitive, or at best neutral effects, if no efficiencies are generated. In contrast, this paper shows that exclusive contracts can have procompetitive effects, provided buyers are imperfect downstream competitors and contract breach is feasible. In that case, an efficient entrant is not necessarily foreclosed through exclusive contracts but induces buyers to breach. Because breaching buyers have to pay expectation damages to the incumbent, the downstream profits they obtain when breaching must be large enough. Therefore, the entrant needs to set a lower wholesale price than absent exclusive contracts, leading to lower final consumer prices and higher welfare.

Do Private Labels Increase Retailer Bargaining Power?

Like any new product, private label entry increases competition within a category leading to downward pressure on both wholesale and retail prices. But, given the higher margins for private labels and potential bargaining benefits for retailers, they have incentives to help private labels gain market share. The paper addresses two questions: First, do private labels enhance a retailer's bargaining power with respect to manufacturers? Second, given the higher profitability and potential increase in bargaining power, does the retailer strategically set retail prices to favor and strengthen the private label? We find support for the “bargaining power” hypothesis, but qualified support for the retailer pricing hypothesis. Retailers gain bargaining power through lower wholesale prices on imitated national brands. But the gain is greater in niche categories than in mass categories, suggesting that niche national brands with limited “pull” power lose greater bargaining power. In terms of strategic pricing, the retailer, on initially introducing the private label, strategically sets prices to help private labels gain market share in high volume mass market categories. But retail prices revert to the category profit maximizing price after a year when the private label gains a stable market share.

Buyer Market Power and Vertically Differentiated Retailers

We consider a model of vertical competition where downstream firms (retailers) purchase an upstream input from a monopolist and are able to differentiate from each other in terms of quality. Our primary focus is to study the effects of introducing a large retailer, such as a Wal-Mart Supercenter, that is able to lower wholesale prices (i.e. buyer market power). We obtain two main results. First, the store with no buyer market power responds to the presence of the large retailer by increasing its quality, a finding that is consistent with recent efforts by traditional retailers to enhance shoppers’ buying experience (i.e. quality). Second, the presence of a large retailer causes consumer welfare to increase. There are, however, two reasons for the increase in consumer welfare: consumers gain from the large retailer’s low price (because the upstream discount is partially passed on to the retail price) as well as from the high quality level offered by the traditional retailer. Contrary to the conventional wisdom most of the consumer welfare gains seem due to the latter. The intuition for this result is that price competition softens substantially as a result of firms’ quality differentiation. We also investigate the effects of buyer market power on retail and wholesale prices as well as on producer welfare.

Market power, price discrimination, and allocative efficiency in intermediate‐goods markets

We consider a monopolistic supplier's optimal choice of two‐part tariff contracts when downstream firms are asymmetric. We find that the optimal discriminatory contracts amplify differences in downstream firms' competitiveness. Firms that are larger—either because they are more efficient or because they sell a superior product—obtain a lower wholesale price than their rivals. This increases allocative efficiency by favoring the more productive firms. In contrast, we show that a ban on price discrimination reduces allocative efficiency and can lead to higher wholesale prices for all firms. As a result, consumer surplus, industry profits, and welfare are lower.

Exclusionary vertical contracts with multiple entrants

This paper constructs a model of anticompetitive exclusive dealing in the presence of multiple entrants. Unlike the single-entrant model in previous literature, an entrant competes not only with the incumbent to deal with buyers but also with other entrants. The competition among entrants then serves as a commitment such that low wholesale prices are offered to buyers when they deviate from exclusive contracts. We argue that this commitment effect becomes a barrier to exclusive dealing and that the results differ drastically from the predictions of the single-entrant framework.

Retail services and firm profit in a dual-channel market

With the rapid development of the Internet, many manufacturers nowadays use online technology to engage in direct sales. The mix of retailing with a direct channel adds a new dimension of competition and complementarity to a product's distribution channels. Our model focuses on the strategic role played by the retail services in a dual-channel competitive market. The manufacturer uses a direct channel as an effective tool to motivate the retailer to improve its retail services and profits from it. While operated by the manufacturer to motivate retailer to perform more effectively from the manufacturer's perspective, the direct channel may not always be detrimental to the retailer because the retailer can obtain a lower wholesale price from the manufacturer and a higher sales volume from the improved retail services. In our research, our results suggest that the improved retail services effectively alleviate the channel competition and conflict and improve the supply chain performance in a competitive market.

Pricing and two-tier advertising with one manufacturer and one retailer

This paper considers the pricing decisions and two-tier advertising levels between one manufacturer and one retailer where customer demand depends on the retail price and advertisement by a manufacturer and a retailer. We solve a Stackelberg game with the manufacturer as the leader and the retailer as the follower. With price sensitive customer demand and a linear wholesale contract, we obtain the optimal decisions by the manufacturer and the optimal responses by the retailer. Our results show that cost sharing of local advertising does not work well, it is better for the manufacturer to advertise nationally and offer the retailer a lower wholesale price.