Two-part Tariff Contract Research Articles

Production Decisions in Remanufacturing with Uncertain Return and Demand

In this paper we analyze a reverse supply chain system that satisfies the market demand with remanufactured products. Demand is assumed to be random and the expected return is to be price-dependent. A firm needs to make recovery and production decision in the face of this uncertainty. We analyze both centralized and decentralized models to determine the optimal acquisition price and the optimal production quantities of remanufactured product for the firm. We also coordinate the decentralized systems with a two-part tariff contract and determine the optimal contract parameters. Finally, we present our numerical analyses to observe the effect of cost parameters on the system performance.

Supply Chain Contracts Under Uncertainty of Retailer Counterfeiting

We model a supply chain scenario in which the genuine manufacturer is uncertain whether a retailer sells counterfeits alongside authentic products. We evaluate the optimal strategies for players under wholesale price contracts and two-part tariff contracts and analyse the impact of the uncertainty of retailer counterfeiting on the manufacturer’s pricing and expected profits. Furthermore, we investigate whether the two-part tariff is more effective compared with the wholesale price contract.

Sustainability investment under cap-and-trade regulation

Carbon emission abatement is a hot topic in environmental sustainability and cap-and-trade regulation is regarded as an effective way to reduce the carbon emission. According to the real industrial practices, sustainable product implies that its production processes facilitate to reduce the carbon emission and has a positive response in market demand. In this paper, we study the sustainability investment on sustainable product with emission regulation consideration for decentralized and centralized supply chains. We first examine the order quantity of the retailer and sustainability investment of the manufacturer for the decentralized supply chain with one retailer and one manufacturer. After that, we extend our study to the centralized case where we determine the production quantity and sustainability investment for the whole supply chain. We derive the optimal order quantity (or production quantity) and sustainability investment, and find that the sustainability investment efficiency has a significant impact on the optimal solutions. Further, we conduct numerical studies and find surprisingly that the order quantity may be increasing in the wholesale price due to the effects of the sustainability and emission consideration. Moreover, we investigate the achievability of supply chain coordination by various contracts, and find that only revenue sharing contract can coordinate the supply chain whereas the buyback contract and two-part tariff contract cannot. Important insights and managerial implications are discussed.

Optimal concession contracts for landlord port authorities to maximise fee revenues

This paper analyses optimal concession contracts offered by a landlord port authority to competing operators of container terminals. The port authority pursues fee-revenue maximisation. Three contract schemes considered are fixed-fee, unit-fee, and two-part tariff. A two-stage game is constructed to characterise interactions between the port authority and two terminal operators. In the first stage, the port authority announces a contract. Then terminal operators compete for cargo amounts in the second stage. We discover that when marginal service costs of the less-efficient operator are small, the port authority would choose between the two-part tariff and the unit-fee schemes. Oppositely, the two-part tariff and the unit-fee schemes are equally preferred. Finally, if both terminal operators’ efficiency is identical, the two-part tariff contract is the best.

Optimizing product service system by franchise fee contracts under information asymmetry

This paper studies the problem of how to effectively provide product service system (PSS) in a service-oriented manufacturing supply chain under asymmetric private demand information. The PSS in the supply chain is operated heterogeneously and complementarily, in which the manufacturer provides the product while the retailer who possesses private demand information is responsible for adding the necessary value-added service on the basic product. We address the issue of how different contracts affect the decisions and profitability of the supply chain members. Three types of contracts are developed to help supply chain partners to make decisions and enhance the supply chain’s efficiency. The first is the franchise fee (FF) contract, under which the manufacturer provides a two-part tariff contract (wholesale price and franchise fee) to influence the retailer’s decision and to detect her private demand information. The second is the franchise fee with service requirement (FFS) contract, under which the manufacturer specifies the service level required in addition to the two-part tariff contract terms. The third is the franchise fee with centralized service requirement (FFCS) contract, which is similar to the FFS contract but that the service level specified by the manufacturer is the system optimal solution. Our analytical results show that all three contracts enable the manufacturer to detect the retailer’s private demand information, with the FFCS contract achieving the greatest channel profit. Finally, numerical examples are presented, and sensitivity analysis of service level and profit are conducted to compare the performance of the three contracts under different settings. The paper provides managerial guidelines for the manufacturer in contract offering under different conditions.

Contract design for two-stage supply chain coordination: Integrating manufacturer-quality and retailer-marketing efforts

This paper investigates the issue of channel coordination for a two-stage supply chain with one retailer and one manufacturer. The demand is influenced by the retailer's sales effort and manufacturer's quality improvement efforts. We found that using the traditional two-part tariff contract alone cannot coordinate the supply chain well. Joining the two-part tariff contract with the quality effort cost sharing model remains ineffective in managing the two-stage supply chain. To effectively coordinate the channel members, we propose an innovative supply chain contract that integrates the endeavors of the manufacturer and the retailer. We identify the optimal level of retail sales effort, optimal level of quality-improvement effort and optimal supply chain profit. Sensitivity analyses are conducted to examine the impacts of changes in the costs of sales effort and quality effort on the performance of the supply chain.

Channel coordination in green supply chain management

Environmental consciousness has become increasingly important in everyday life and business practice. The effort to reduce the impact of business activities on the environment has been labelled as green supply chain management. Any major greening project would require efforts on the part of the entire supply chain. However, very few studies have addressed the issue of coordinating the green supply chain. We consider the problem of coordination of a manufacturer and a retailer in a vertical supply chain, who put in efforts for ‘greening’ their operations. We address some pertinent questions in this regard such as extent of effort in greening of operations by manufacturer or retailer, level of cooperation between the two parties, and how to coordinate their operations in a supply chain. The greening efforts by the manufacturer and retailer result in demand expansion at the retail end. The decision variables of the manufacturer are wholesale price and greening effort, while those of the retailer are retail price and its greening effort. We find that the ratio of the optimal greening efforts put in by the manufacturer and retailer is equal to the ratio of their green sensitivity ratios and greening cost ratios. Further, profits and efforts are higher in the integrated channel as compared to the case of the decentralized channel. Finally, a two-part tariff contract is found to produce channel coordination in this problem. A numerical example illustrates the results.

Coordinating Contracts for Two-Stage Fashion Supply Chain with Risk-Averse Retailer and Price-Dependent Demand

When the demand is sensitive to retail price, revenue sharing contract and two-part tariff contract have been shown to be able to coordinate supply chains with risk neutral agents. We extend the previous studies to consider a risk-averse retailer in a two-echelon fashion supply chain. Based on the classic mean-variance approach in finance, the issue of channel coordination in a fashion supply chain with risk-averse retailer and price-dependent demand is investigated. We propose both single contracts and joint contracts to achieve supply chain coordination. We find that the coordinating revenue sharing contract and two-part tariff contract in the supply chain with risk neutral agents are still useful to coordinate the supply chain taking into account the degree of risk aversion of fashion retailer, whereas a more complex sales rebate and penalty (SRP) contract fails to do so. When using combined contracts to coordinate the supply chain, we demonstrate that only revenue sharing with two-part tariff contract can coordinate the fashion supply chain. The optimal conditions for contract parameters to achieve channel coordination are determined. Numerical analysis is presented to supplement the results and more insights are gained.

Research on the Fresh Agricultural Product Supply Chain Coordination with Supply Disruptions

This paper develops a dynamic model in a one-supplier-one-retailer fresh agricultural product supply chain that experiences supply disruptions during the planning horizon. The optimal solutions in the centralized and decentralized supply chains are studied. It is found that the retailer’s optimal order quantity and the maximum total supply chain profit in the decentralized supply chain with wholesale price contract are less than that in the centralized supply chain. A two-part tariff contract is proposed to coordinate the decentralized supply chain with which the maximum profit can be achieved. It is found that the optimal wholesale price should be a decreasing piecewise function of the final output. To ensure that the supplier and the retailer both have incentives to accept the coordination contract, a lump-sum fee is offered. The interval of lump-sum fee is given leaving both the supplier and the retailer better off with the two-part tariff contract.

Supply chain contracting with competing suppliers under asymmetric information

This article employs a screening model to examine the problem of supply chain contracting involving one retailer and two suppliers. The two suppliers compete to sell their products, which are partial substitutes, through a common retailer. The problem is analyzed using a two-stage game. In the first stage, suppliers independently but simultaneously announce the contract bundles. The retailer, who is closer to customers, has superior market information and decides which contracts to sign. Then the suppliers invest in raw materials. In the second stage, the retailer sets prices, which in turn determine the demand rates of products, to optimize their profits. The game is analyzed for two types of contracts: two-part tariff contracts and quantity discount contracts. The retailer’s optimal strategy is derived and the suppliers’ optimal contract design for both types of contracts is fully characterized. In particular, the performance of the two types of contracts is evaluated when the two products are independent. The result suggests that the information rent is higher under quantity discounts than two-part tariffs, although the latter makes the supplier better off. Additionally, the two types of contracts are compared in terms of total supply chain profit, information rent, and suppliers’ expected profits when the two products are imperfect substitutes. Both analytical and numerical results support the proposed approach.

Technology licensing, R&D and welfare

This paper sets up a three-stage (R&D, technology licensing, and output) oligopoly game in which only one of the firms undertakes a cost-reducing R&D and may license the developed technology to the others by means of a two-part tariff (i.e., a per-unit royalty and an upfront fee) contract. It is found with surprise that if the licensor firm’s R&D efficiency is high, the availability of licensing subdues the firm’s R&D incentive, leading to a lower social welfare level. This result implies that a government has to be cautious when encouraging technology licensing among firms.

Product Innovation in a Vertically Differentiated Model

We study the licensing incentives of an independent input producer owning a patented product innovation which allows the downstream firms to improve the quality of their final goods. We consider a general two-part tariff contract for both outside and incumbent innovators. We find that technology diffusion critically depends on the nature of market competition (Cournot vs. Bertrand). Moreover, the vertical merger with either downstream firm is always privately pro table and it is welfare improving for large innovations: this implies that not all pro table mergers should be rejected.

Strategic upfront marketing channel integration as an entry barrier

This paper investigates an organizational design problem concerning whether duopolistic firms competing in a product market should vertically integrate or separate their marketing channels in a dynamic noncooperative game setting. Previous operational research models have shown that the separation of the marketing channel with the adoption of a two-part tariff contract is the dominant strategy compared with integration for each firm if the two firms face retail price competition, and thereby constitutes the subgame perfect Nash equilibrium (SPNE). Contrary to this previous insight, this paper demonstrates that if exogenous parameters that characterize fixed costs, product substitutability, and a demand function fall into a specific region, marketing channel integration dominates the separation strategy when one of the two firms is the incumbent firm while the other is a potential entrant. In other words, the well-known result in the price-setting game can be reversed when we take entry threats into consideration. Specifically, we show that upfront vertical integration of the marketing channel enables the incumbent to deter the entry of the potential competitor and to monopolize the market in the SPNE. This result has operational implications for a firm confronting the threat of potential rivals entering the market, in that the firm can use this apparently inferior strategy as a commitment device, which creates a virtual entry barrier.

Study on Discrimination Pricing Model of Closed-Loop Supply Chain with Product Remanufacturing

With awareness of environmental protection strengthens and constraints of regulations and laws to environmental protection increasing, more and more enterprises focus on the closed-loop supply chain management. Considering difference between new product and remanufactured product, this paper constructs closed-loop supply chain system with manufacturers recycling used products directly from the consumers based on game theory. The optimal pricing decisions and the optimal profit of centralized and decentralized closed-loop supply chain are obtained. It is found that the efficiency of decentralized closed-loop supply chain decreases by 25%. At last, the coordination mechanism is designed to solve the profit conflict in the decentralized closed-loop supply chain by the two-part tariff contract.

Inference on vertical contracts between manufacturers and retailers allowing for nonlinear pricing and resale price maintenance

We present a model of vertical contracts between manufacturers and retailers with nonlinear pricing strategies. Using home-scan data on bottled water produced by manufacturers and sold by retail chains in France, we estimate a structural demand and supply model allowing for two-part tariff contracts between manufacturers and retailers. Using price-cost margins recovered from estimates of demand parameters, we select the best supply model by performing nonnested tests, and find that manufacturers use two-part tariff contracts with resale price maintenance. We then perform counterfactual policy simulations that restrict the use of these vertical contracts and assess welfare effects under alternative scenarios.

Channel Coordination in a Green Supply Chain in the Presence of Demand Expansion Effects

We consider the problem of a single manufacturer who sells its products to a single retailer. The manufacturer puts in some effort for greening its operations, and the retailer also puts in a corresponding greening effort in retailing the product. Their respective greening efforts are considered to have “expansion” effects on the retail demand. The manufacturer makes decisions on the wholesale prices and its greening efforts, while the retailer makes decisions on the retail price and its corresponding greening efforts.Our results show that: The ratio of the optimal greening efforts put in by the manufacturer and retailer is equal to the ratio of their green sensitivity ratios and greening cost ratios. This result holds irrespective of whether it is an integrated or a decentralized channel, Profits are higher and efforts are higher in the integrated channel as compared to the case of the decentralized channel. This is consistent with the earlier research in the channels literature, Interestingly, however, we find that, under certain conditions, optimal prices are higher in the integrated channel as compared to the case of the decentralized channel. This is not consistent with the usual 'double marginalization' explanation given in the channels literature, By and large, the above results replicate themselves in the cases in which only one of the two channel members (i.e., either manufacturer or retailer) puts in the greening effort, A two-part tariff contract from the manufacturer to the retailer, which takes into account the relevant parameters of prices and greening efforts, can produce the desired effect of channel coordination in this problem. A numerical example illustrates some of these results.

Information transmission in launching a new private label product

With the buyer’s market strengthening, retailers have begun to lead in product development by introducing their own private label products. The success of such a new product launch relies on transmission of demand information along a supply chain, yet this new phenomenon has been little researched. This paper attempts to address such an issue by modeling vertical information transmission in a supply chain consisting of a retailer and a manufacturer. The retailer would like to introduce a new private label product and knows the demand of the product to be either high or low, while the manufacturer only knows the prior distribution of the demand type. This study attempts to find whether a wholesale-price contract or a two-part tariff contract can facilitate the manufacturer to identify the demand type. The results show that the two-part tariff contract is always effective in realizing information transmission as long as the retailer’s reserve profit remains within a reasonable range.

Strategic Inventories in Vertical Contracts

Classical reasons for carrying inventory include fixed (nonlinear) production or procurement costs, lead times, nonstationary or uncertain supply/demand, and capacity constraints. The last decade has seen active research in supply chain coordination focusing on the role of incentive contracts to achieve first-best levels of inventory. An extensive literature in industrial organization that studies incentives for vertical controls largely ignores the effect of inventories. Does the ability to carry inventory influence the problem of vertical control? Conversely, can inventories arise purely due to incentive effects? This paper explicitly considers both incentives and inventories, and their interplay, in a dynamic model of an upstream firm (supplier) and a downstream firm (buyer) who can carry inventories. In our model, none of the classical reasons for carrying inventory exists. However, as we prove, the buyer's optimal strategy in equilibrium is to carry inventories, and the supplier is unable to prevent this. These inventories arise out of purely strategic considerations not yet identified in the literature, and have a significant impact on the equilibrium solution as well as supplier, buyer, and channel profits. We prove that strategic inventories play a pivotal role under arbitrary contractual structures, general (arbitrary) demand functions and general (finite or infinite) horizon lengths. As one example, two-part tariff contracts do not lead to optimal channel performance, nor can the supplier extract away all of the channel profits, in our dynamic model. Our results imply that firms can and must carry inventories strategically, and that optimal vertical contracts must take the possibility of inventories into account.

Research Note—The Effects of Costs and Competition on Slotting Allowances

We consider the optimal two-part tariff contract between a manufacturer and a retailer. We show that retail competition (in the presence of either fixed costs or bargaining power) may lead to slotting allowances in an optimal contract, even with a monopoly manufacturer and no information asymmetry. On the other hand, slotting allowances do not arise with a monopoly retailer and no information asymmetry, whether the manufacturer is a monopoly or not. We also show that more intense retail competition, higher retail bargaining power, larger retailer fixed costs, lower marginal costs of retailing, as well as larger relative retailer size (whether coming from a location or operating advantage), have a positive impact on the incidence and the magnitude of slotting allowances. The opposing effects of the fixed and marginal operating costs on slotting allowances, as well as the impact of competition and bargaining power on profits, underscore the importance of careful definitions of these variables in empirical research.

Upstream horizontal mergers, vertical contracts, and bargaining

We study horizontal mergers in the upstream sectors of vertically related industries when bargaining is present and contract types are endogenous. We demonstrate that the contract types used can have significant implications for the equilibrium market structure and vice versa. When trading takes place through two-part tariff contracts, merger incentives are absent. However, when the downstream firms are powerful, merger incentives are restored since the merger leads then either to the exclusive or to the partial use of wholesale price contracts. Finally, we show that whenever a merger occurs, it is welfare detrimental.