Percentage Markup Research Articles

Questioning profit inflation as an explanation of the post-pandemic inflation

The COVID-19 pandemic eventually gave rise to large increases in profits, profit shares and inflation rates. A major controversy has developed among economists and in the media about whether this was largely caused by profit inflation, that is, by increases in the percentage mark-ups set by firms. The paper attempts to clear some confusions regarding the issue of profit inflation, dealing with its definitions and the complexities of its measures. In particular, it shows that increases in economic activity and increases in the relative cost of domestic or imported inputs will lead to an increase in realized profit margins even if percentage mark-ups remain constant. The paper also lists a series of factors that may mitigate the results of empirical studies that show an increase in the aggregate value of this percentage mark-up.

How power structure and markup schemes impact supply chain channel efficiency under price-dependent stochastic demand

Although considerable attention has been separately given to factors such as power structures, price-dependent demand, and markup pricing schemes, there has been limited exploration of the combined effects of these factors on supply chain efficiency and the leader’s advantage. We propose a game theoretic model in which a manufacturer sells a single product to a newsvendor retailer who sets both optimal order quantity and selling price under uncertain price-dependent demand. Furthermore, we examine a supply network wherein a single retailer fulfills orders using a global manufacturer for regular orders and a local manufacturer to clear any shortages. Through numerical analysis, we show that the retailer always prefers to charge a percentage markup. In a two-player game, channel efficiency is higher when the retailer is the leader under linear demand; however, under iso-elastic demand, the manufacturer being a leader brings a higher channel efficiency. When a local manufacturer is involved as a second manufacturer, channel efficiency is higher when the retailer remains a follower, as this induces more fierce wholesale price competition between the two manufacturers. Additionally, when demand uncertainty is high in the two-player game with linear demand, the retailer as a follower can achieve higher profits, whilst high uncertainty under iso-elastic demand decreases both players’ profits. Moreover, it becomes advantageous for the retailer to have a local manufacturer as demand uncertainty increases, even when the local manufacturer announces the wholesale price first.

Uniform vs. retailer-specific pricing: How a supplier responds to the dominant retailers’ markup pricing strategy

This paper investigates how dominant retailers should choose appropriate markup pricing strategies (a fixed-dollar markup, or a percentage markup), and how their supplier responds by choosing wholesale pricing strategies (a retailer-specific wholesale pricing, or a uniform wholesale pricing). Our results show that, all other things being equal, the uniform wholesale pricing strategy weakens the position of the retailers in the supply chain and thus is more favorable for the supplier. Specifically, when both retailers choose the same markup scheme, it is better for the supplier to choose the uniform wholesale pricing strategy since it can lead a higher profit for himself. The uniform wholesale pricing strategy also benefits the whole channel and the end-consumers, but hurts the dominant retailers. When the two retailers choose different markup schemes, the best choice for the supplier will still be the uniform wholesale pricing scheme if the level of downstream competition is sufficiently high; otherwise, the supplier would prefer the retailer-specific wholesale pricing scheme. The preference of the retailer using fixed-dollar markup pricing is just the opposite as compared to that of the supplier, while the retailer using percentage markup pricing always prefers retailer-specific wholesale pricing. Besides, the uniform wholesale pricing is beneficial to the whole channel. After anticipating the supplier’s reactions, both retailers are better off choosing percentage markup pricing no matter which wholesale pricing strategy the supplier chooses and what the level of competition is. Therefore, the final equilibrium would be the case where the dominant retailers choose the percentage-markup variant and the supplier always responds by adopting the uniform pricing scheme no matter what the level of bcompetition is. This equilibrium enhances the supply chain efficiency and benefits the end-consumers since it leads to the highest channel profits and the lowest retailing prices. Moreover, under this equilibrium, the supplier gets better while the retailers get worse as the level of competition increases.

Availability, Prices and Affordability of Antibiotics Stocked by Informal Providers in Rural India: A Cross-Sectional Survey.

Providers without formal training deliver healthcare and antibiotics across rural India, but little is known about the antibiotics that they stock. We conducted a cross-sectional survey of such informal providers (IPs) in two districts of West Bengal, and assessed the availability of the antibiotics, as well as their sales volumes, retail prices, percentage markups for IPs and affordability. Of the 196 IPs that stocked antibiotics, 85% stocked tablets, 74% stocked syrups/suspensions/drops and 18% stocked injections. Across all the IPs, 42 antibiotic active ingredients were stocked, which comprised 278 branded generics from 74 manufacturers. The top five active ingredients that were stocked were amoxicillin potassium clavulanate (52% of the IPs), cefixime (39%), amoxicillin (33%), azithromycin (25%) and ciprofloxacin (21%). By the WHO’s AWaRe classification, 71% of the IPs stocked an ACCESS antibiotic and 84% stocked a WATCH antibiotic. The median prices were in line with the government ceiling prices, but with substantial variation between the lowest and highest priced brands. The most affordable among the top five tablets were ciprofloxacin, azithromycin, cefixime and amoxicillin (US$ 0.8, 0.9, 1.9 and 1.9 per course), and the most affordable among the syrups/suspensions/drops were azithromycin and ofloxacin (US$ 1.7 and 4.5 per course, respectively), which are mostly WATCH antibiotics. IPs are a key source of healthcare and antibiotics in rural communities; practical interventions that target IPs need to balance restricting WATCH antibiotics and expanding the basket of affordable ACCESS antibiotics.

Detecting Fraudulent Billing Frauds Under The Shell Company Schemes: From the Perspective of Hong Kong Auditors

Asset misappropriation, which occurred in the vast majority of fraud schemes, involved stealing or misusing the company’s assets and resources by perpetrators through false invoicing and shell company schemes. False invoicing occurred when a perpetrator created a fictitious vendor for purchasing goods for the employer, used false invoices to make a claim for payment and diverted the fund to its own account. The main purpose of this study is to detect fraudulent billing frauds under the shell company schemes which pose significant risk to the organizations. Shell company operations mainly involve 1) a perpetrator created a shell company, which was only a fictitious name with P.O. Box address, added it to the current vendor master file to facilitate the company’s purchases and also used it to receive payment from false billings; and 2) the shell company was also used as an intermediary to assist the pass-through scheme wherein a legitimate vendor sold goods to this shell company which in turn resold goods to the victim organization with a certain percentage markup on price. Shell company and billing schemes did not receive much attention in prior audit literature and audit practices. This study aimed to investigate the level of effectiveness of red flags in detecting the fraudulent billing schemes from the perspective of auditors (inclusive both external and internal auditors) in Hong Kong and also to explore the effectiveness of fraud data analytics in detecting the billing schemes under the shell companies. For the assessment and perception of red flags for fraud detection, the study extracted a total of 15 red flags from Kassem’s framework and used questionnaire survey to examine the auditors’ responses to red flags in detecting fraudulent billings and release the resultant ranking. Sem-structured interviews were used to obtain data about the effective use of data analytics by auditors to detect fraudulent billings under the shells.

FOOD CHAIN PRICE DIFFERENCES – THEORETICAL AND METHODOLOGICAL ASPECTS

The article is for illustrative purposes and presents the general situation of price differences in the food chain in theoretical and methodological aspects. The main objective of the research was to assess the market situation of the purchase of agricultural products against a background of prices in retail stores. The research was conducted using the observational method in mid-2021. The subject of the study were the 20 most popular agricultural products, purchased directly from the agricultural producer and through retail chains as products ready for sale unchanged from the moment of purchase. The volatility of prices between different links in the food chain was also determined using Pearson’s linear correlation. The differences in the estimated percentage mark-up of selected retail chains in relation to the obtained values of the price relation index are presented. It was found that the analyzed price differences constituted a complex research problem and were conditioned by many determinants. The relation between the prices offered for agricultural products in purchase and retail prices was often 200%. The main reason for the price differences was the extensive supply chain between the farmer and the chain of stores. The results of the correlation of price volatility allowed to conclude that there was a phenomenon related to the transfer of price risk in the scope of subsequent links of the food chain.

Pediatrics Hospital Care in China Before and After Policy Change: A Case Study

Worldwide, healthcare policy change ranks among the top three issues in the public’s consciousness. This study introduces a case study of pediatric hospitalizations at one hospital in Northern China. It seeks to assess whether pediatric hospitalization access, costs, and costs structures favorably changed after selected health policy reforms were implemented in China. A census of all hospital pediatric discharge data from 2015 to 2018 were collected from a general public tertiary hospital in Northern China. Using generalized linear regression, changes in charges for length of stay, daily charges, total charges per discharge, and drug charges and medical service fees as a percent of total charges were analyzed as a function of two independent variables - policy changes regarding the merger of two health insurance programs, and the zero-markup drug pricing policy. These variables were included as dummy variables for the pre-and-post change periods. The covariates used included patient age, sex, and the year. After the policy implementation, significant decreases (P<.01) were found in the length of the hospital stay (-0.49 days) and drug and medical charges (-7.63%) as a percent of total charges. A significant decrease also occurred (P<.01) in the number and percent of pediatric patients served who were self-pay after the merger of the NCMS insurance plan into the URBMI. Drug costs as a proportion of total costs also decreased significantly (P<.01). Thus, the findings revealed that the zero-markup drug pricing policy was associated with a significant decrease (P<.01) in the mean percentage markup for drug charges (P<.01). Accordingly, both health policy changes were associated with positive effects on pediatric healthcare expenditures, and access. This research suggests that as these two policies are fully implemented at public tertiary hospitals throughout China, pediatric hospital care may become even more accessible and drugs less costly.

Evaluation of availability, price, and affordability of cardiovascular, diabetes, and global medicines in Abuja, Nigeria.

ObjectiveTo assess the availability, price, and affordability of cardiovascular, diabetes, and global medicines in Abuja, Nigeria.MethodsA cross-sectional survey involving 27 private pharmacies, 13 public pharmacies, and 25 private hospital pharmacies in Abuja was conducted using the standardized World Health Organization/Health Action International methodology. The availability percentage for each pharmacy sector and each medicine was analyzed. The median price ratio (MPR) (ratio of the median price to the international reference prices) of the medicines were evaluated accordingly. Affordability was assessed by calculating the number of days’ wages the lowest-paid unskilled government worker required to purchase a month worth of the standard treatment for a chronic condition.ResultsThe availability of cardiovascular (CV) medicines ranged from 28.4% (in private hospital pharmacies) to 59.9% (in private pharmacies). There was mixed variability in the mean availability of Originator Brands (OBs) and Lowest Priced Generics (LPGs) anti-diabetic drugs with the highest availability being OBs 36% and LPGs 40.2%, in private pharmacies and public pharmacies, respectively. The availability of global drugs ranged from 49.7% in private hospitals to 68.8% in private pharmacies. Two cardiovascular and four global medicines had greater than 80% availability across the pharmaceutical sectors. The median price ratio for OBs and LPGs was 9.60 and 1.72 for procurement, it was 8.08 and 2.60 in private pharmacies, 13.56 and 2.66 in public hospitals, and 16.38 and 7.89 in private hospitals. The percentage markup on LPG was 49.4% in public hospitals, 51.4% in private pharmacies, and 323% in private hospitals. Only nine medicines in both public hospitals and private pharmacies and two in the private hospital pharmacies required less than the daily wage of the lowest-paid government worker.ConclusionThe availability of cardiovascular, diabetes, and global medicines was below 80% across the different pharmaceutical sectors in Abuja and the medicines were unaffordable. Although the prices were generally exorbitant, private pharmacies offered the best options in terms of availability, pricing, and affordability of medicines. Therefore, the results of this study emphasize the pertinence of enforcing policies that facilitate the availability, pricing, and affordability of cardiovascular, diabetes, and global medicines.

Price, Availability, and Affordability of Antineoplastic Medicines in Harare’s Public and Private Institutions: Implication for Access

ObjectivesTo determine the price, availability, and affordability of antineoplastic medicines in private and public sector pharmacies in Harare Metropolitan Province, Zimbabwe. MethodsThe study was based on the methodology recommended by the World Health Organization and Health Action International. A total of 32 antineoplastic medicines in 3 public central hospitals and 150 private pharmacies were surveyed. The median price ratio, percentage availability, affordability, and percentage markups were calculated. ResultsAvailability at the public institutions was 28%, whereas the private sector ranged from 1.3% to 42.7%. The median price ratio in the private sector ranged from 0.6 to 11, whereas the public sector ranged from 0.73 to 2.25. Affordability in the public sector ranged from 1 to 10 days wage and from 1 to 490 days wage in the private sector. The average percentage markup was 51.3% in the private sector and 34% in the public sector. ConclusionAntineoplastic medicines were more available in the private sector than in the public sector, but more affordable in the public sector. The average percentage markups for antineoplastic medicines demonstrated that medicines were not overpriced in the public sector, but in the private sector were sold at prices higher than the international reference price.

Factors Impacting Pharmaceutical Prices and Affordability: Narrative Review.

Increasing prescription drug pricing often reflects additional work stress on medical professionals because they function as financial advisors for patients and help them manage out-of-pocket expenses. Providers or prescribers wish to help patients with prescription costs but often lack related information. Healthcare plan providers try to display prescription and drug cost information on their websites, but such data may not be linked to electronic prescription software. A mark-up is defined as the additional charges and costs that are applied to the price of a product for the purpose of covering overhead costs, distribution charges, and profit. Therefore, the policies implemented in the pharmaceutical distribution chain might include the regulation of wholesale and retails mark-ups and pharmaceutical remuneration. If mark-ups are regulated, countries are highly recommended to use regressive mark-ups rather than fixed percentage mark-ups. This narrative review provides insights into the framework of pharmaceutical mark-up systems by describing different factors impacting pharmaceutical prices and affordability. These include the interplay of medicine pricing and the supply chain, the impact of pertinent laws and regulation and out-of-pocket expenditure.

Legal cannabis market shares during Canada's first year of recreational legalisation

BackgroundThis study estimated legal products’ share of Canada's total cannabis consumption during the first year of recreational legalisation, October 2018 to September 2019. MethodsGovernment data was used to estimate monthly recreational sales in dollars per capita, grams per user, and percentage share of kilograms or litres consumed. As explanatory factors, the analysis considered provincial differences in retail pricing (percentage mark-ups) and store density (stores per million users), as well as national monthly production of dry cannabis (kilograms) and cannabis oil (litres) finished products. ResultsLegal recreational products’ share of Canada's overall cannabis consumption began at 7.8% in October 2018 and grew to 23.7% by September 2019, with an average of 14.5% over the first 12 months. Sales growth was delayed by shortages of both dry cannabis products and licensed stores, but not cannabis oils. Across the 10 provinces, legal recreational shares in September 2019 varied from 13% to 70%; differences in store densities and retail prices partly explained the variation. Prince Edward Island's large 70% share seemed due to it having minimal product shortages, high store densities, and low prices. ConclusionsLegal recreational products captured market share to the extent they were available, accessible, and low-priced. Problems with those factors slowed the initial expansion of legal product sales but also suggested ways to gradually increase their market share.

Factors Affecting Wine Price Mark-up in Restaurants

AbstractThe purpose of this study is to examine how restaurants determine the percentage of wine mark-up. Wine sales are a substantial contributor to restaurants’ profitability, therefore a better understanding of the factors affecting mark-up is critical for the industry. Here, the mark-up is expressed as a percentage over the cost and refers to a cost-plus pricing strategy. Sommeliers from around the world, the majority of whom were members of the International Sommelier Association, were approached to complete our Internet-based questionnaire administered between February 2014 and May 2014. Of the 800 who began the survey, 267 fully completed the questionnaire, generating 1,869 observations. We regressed the declared percentage mark-up against restaurant and wine list characteristics, including managerial practices and wine steward characteristics, and showed that if the restaurants apply a simple rule of thumb to set wine prices, focusing on every price segment, it appears that sommeliers do not have much impact on the percentage mark-up. (JEL Classifications: C23, D21)

Equilibrium Analysis of Markup Pricing Strategies Under Power Imbalance and Supply Chain Competition

This study uses a game-theory-based analytical model to examine the consequences of two markup pricing schemes, fixed-dollar markup and percentage markup, in a supply chain-to-chain competition setting with power imbalance between dominant retailers. Our results show that the equilibrium pricing strategy depends on the level of supply chain-to-chain competition. Specifically, if the level of supply chain competition is not sufficiently high, the equilibrium pricing strategy for the two retailers will be the one in which both retailers choose to adopt the percentage markup pricing policy, i.e., the [PP] strategy. Unfortunately, this equilibrium will lead the retailers into the prisoner's dilemma in some common situations. However, if the level of competition is extremely high, the equilibrium pricing strategy will be that where the leader (Retailer 1) chooses the percentage markup pricing policy and the follower (Retailer 2) selects the fixed-dollar markup pricing policy, i.e., the [PF] strategy. This equilibrium pricing strategy always hurts Manufacturer 1, but might benefit Manufacturer 2 when the level of competition exceeds a certain threshold. From the perspective of the end-consumers, they prefer the level of competition to be kept below a certain threshold such that the [PP] strategy becomes the equilibrium pricing strategy because this equilibrium leads to the lowest retail prices. Furthermore, our results show that Retailer 1 suffers a first-mover disadvantage even under a linear demand curve, and this situation cannot be alleviated by abandoning its price-leader position to share power equally with Retailer 2.

An Empirical Model of Automobile Engine Variant Pricing

This paper estimates a random-coefficients structural model of the demand for car model engine variants. It uses a new identification approach that assumes the mean unobserved quality is the same for all engine variants within a model. The demand estimates imply that absolute markups increase in horsepower within a car model, while percentage markups are constant or falling in horsepower. The estimated results–as well as simulations of a simple theory model–show that prices are not typically cost-plus-fixed-fee, and absolute markups may increase in quality.

Value-Based Physician Payment in Oncology: Public and Private Insurer Initiatives.

Policy Points: Public and private insurers are implementing payment mechanisms to improve coordination and reduce the cost of drug, hospital, and ancillary services for cancer patients. Some target unnecessary hospitalization, while others create incentives for prescribing lower‐cost chemotherapies and biologics. Physician payment methods in oncology require a balance between incentives for cost control and incentives for patient access to expensive specialty drugs. None of the initiatives adopt bundled methods out of concern for shifting excessive financial risk onto physicians in the context of rapid pharmaceutical innovation. ContextHigh‐value oncology requires physicians to monitor and coordinate all aspects of care, educate and engage their patients, and adopt cost‐effective drug treatments. However, oncology practices in the United States traditionally have been reimbursed based on the number of office visits performed and through cost‐plus margins from prescription of expensive drugs. Public and private payers now are experimenting with methods of payment that include monthly care management fees, annual bonuses, and incentives for conservative choice among alternative drug regimens.MethodsThis paper uses case study methods to examine oncology payment initiatives at Medicare, Anthem, Aetna, and UnitedHealthcare, the nation's largest public and private health insurance plans.FindingsThe 4 insurers supplement traditional fee‐for‐service payment with payment methods designed to promote coordination of care and conservative use of health care resources. Medicare, Aetna, and UnitedHealthcare reward oncology practices that reduce per‐patient spending, targeting unnecessary patient visits to emergency departments and hospitals. Anthem offers monthly payments to practices that adhere to lower‐cost drug treatment pathways; Aetna increases the percentage markup on low‐cost generic chemotherapies but not on high‐cost biologics; and UnitedHealthcare removes the linkage between physician payment and spending on office‐infused drugs. As a condition for receiving the new payments, each of the initiatives requires participating practices to report and, in some cases, improve performance on quality metrics. None of the initiatives bundles payment for oncology drugs together with payment for other oncology services, out of concern for shifting financial risk onto physicians and creating access barriers for patients.ConclusionsThe emerging “value‐based” methods of oncology payment supplement fee‐for‐service and cost‐based reimbursements with per‐month and per‐episode payments, but none of the payers bundle spending on cancer drugs with payments for other services. Payers recognize that bundled payment could create access barriers for patients and undermine innovation in effective but expensive new pharmaceuticals.

Assessment of farmed tilapia value chain in Ghana

The study assessed the value chain of farmed tilapia in Ghana. A survey conducted in 2012 provided data on key actors, flow of products and information, costs and margins, and relationship among actors. The study showed that all key actors in the value chain: input suppliers; fish farmers; traders; and food services had positive margins except fish farmers. Input suppliers accrued most of the margins generated along the chain. The performance of chain actors was assessed using a factor evaluation matrix, which showed that product offering may be the strength at each stage of the value chain. The efficiency and profitability of tilapia value chain in Ghana can be improved by having well-defined payment transaction with customers, persistent relationships with customers, and good information management such as keeping good records on costs and revenues. Fish farming could be more profitable if farmers reduced their variable costs, priced their fish using a cost plus or percentage markup approach, and adopted target marketing.

Equilibrium markup pricing strategies for the dominant retailers under supply chain to chain competition

Markup pricing policies have been widely employed in the retailing industry. Under such policies, a retailer requires a retail margin over the wholesale price charged by the supplier to guarantee her profitability. This paper investigates and compares the performance of two commonly used markup pricing policies, namely, fixed-dollar markup and percentage markup, for the dominant retailers facing chain-to-chain competition. Our results demonstrate that the equilibrium pricing strategy for the dominant retailers seeking to maximise their respective profits is [PP]-strategy (i.e. both retailers select the percentage markup pricing policy), no matter what the demand curve and the level of chain-to-chain competition are. Unfortunately, this equilibrium will get in the prisoner’s dilemma since the percentage markup pricing strategy might yield lower profits for the retailers and suppliers compared to its fixed-dollar counterpart when the level of chain-to-chain competition is high enough under the linear demand, which is contrast to the literature. If the criteria for the dominant retailers to select which markup pricing policy to offer is the whole channel’s profit obtained under the decentralised decision-making scenario instead of themselves, [PP]-strategy is the dominant strategy and the unique Nash equilibrium of the pricing policy choice game regardless of the competitive intensity under the iso-elastic demand. This result holds true for the linear demand only when the level of chain-to-chain competition is below certain threshold; otherwise, both [FF] (i.e. both retailers select the fixed-dollar markup pricing policy) and [PP] can be the equilibrium pricing strategy.

Prices and mark-ups on antimalarials: evidence from nationally representative studies in six malaria-endemic countries.

The private for-profit sector is an important source of treatment for malaria. However, private patients face high prices for the recommended treatment for uncomplicated malaria, artemisinin combination therapies (ACTs), which makes them more likely to receive cheaper, less effective non-artemisinin therapies (nATs). This study seeks to better understand consumer antimalarial prices by documenting and exploring the pricing behaviour of retailers and wholesalers. Using data collected in 2009–10, we present survey estimates of antimalarial retail prices, and wholesale- and retail-level price mark-ups from six countries (Benin, Cambodia, the Democratic Republic of Congo, Nigeria, Uganda and Zambia), along with qualitative findings on factors affecting pricing decisions. Retail prices were lowest for nATs, followed by ACTs and artemisinin monotherapies (AMTs). Retailers applied the highest percentage mark-ups on nATs (range: 40% in Nigeria to 100% in Cambodia and Zambia), whereas mark-ups on ACTs (range: 22% in Nigeria to 71% in Zambia) and AMTs (range: 22% in Nigeria to 50% in Uganda) were similar in magnitude, but lower than those applied to nATs. Wholesale mark-ups were generally lower than those at retail level, and were similar across antimalarial categories in most countries. When setting prices wholesalers and retailers commonly considered supplier prices, prevailing market prices, product availability, product characteristics and the costs related to transporting goods, staff salaries and maintaining a property. Price discounts were regularly used to encourage sales and were sometimes used by wholesalers to reward long-term customers. Pricing constraints existed only in Benin where wholesaler and retailer mark-ups are regulated; however, unlicensed drug vendors based in open-air markets did not adhere to the pricing regime. These findings indicate that mark-ups on antimalarials are reasonable. Therefore, improving ACT affordability would be most readily achieved by interventions that reduce commodity prices for retailers, such as ACT subsidies, pooled purchasing mechanisms and cost-effective strategies to increase the distribution coverage area of wholesalers.

Discrete Rule Learning and the Bidding of the Sexes

We present a hidden Markov model of discrete strategic heterogeneity and learning in first price independent private values auctions. The model includes three latent bidding rules: constant absolute mark-up, constant percentage mark-up, and strategic best response. Rule switching probabilities depend upon a bidder's past auction outcomes. We apply this model to a new experiment that varies the number of bidders, the auction frame between forward and reverse, and includes the collection of saliva samples - used to measure subjects' sex hormone levels. We find the proportion of bidders following constant absolute mark-up increases with experience, particularly when the number of bidders is large. The primary driver here is subjects' increased propensity to switch strategies when they experience a loss (win) reinforcement when following a strategic (heuristic) rule. This affect is stronger for women and leads them spend more time following boundedly rational rules. We also find women in the Luteal and Menstrual phases of their menstrual cycle bid less aggressively, in terms of surplus demanded, when following the best response rule. This combined with spending more time following simple rules of thumbs explains gender differences in earnings.

Pricing and effort investment for a newsvendor-type product

We investigate a dominant retailer’s optimal joint strategy of pricing and timing of effort investment and analyze how it influences the decision of the manufacturer, the total supply chain profit, and the consumers’ payoff. We consider two pricing schemes of the retailer, namely, dollar markup and percentage markup, and two effort-investment sequences, namely, ex-ante and ex-post. A combination of four cases is analyzed. Our results show that: (1) under the same effort-decision sequence, a percentage-markup pricing scheme leads to higher expected profit for the retailer and the whole supply chain, but a lower expected profit for the manufacturer and a higher retail price for the consumers; (2) under the same markup-pricing strategy, the dominant retailer always prefers to postpone her effort decision until the manufacturer makes a commitment to wholesale price, since it can result in a Pareto-improvement for all the supply chain members. That is, the retailer’s and manufacturer’s expected profits are higher and the consumers pay a lower retail price; and (3) among the four joint strategies, the dominant retailer always prefers the joint strategy of percentage-markup plus ex-post effort decision. However, the dominated manufacturer always prefers the joint strategy of dollar-markup plus ex-post effort decision, which is also beneficial to the end consumers.