Two-part Tariff Contract Research Articles

Resale Price Maintenance with Strategic Customers

We consider a decentralized supply chain (DSC) under resale price maintenance (RPM) selling a limited‐lifetime product to forward‐looking customers with heterogeneous valuations. When customers do not know the inventory level, double marginalization under RPM leads to a higher profit and aggregate welfare than without RPM under a two‐part tariff contract (TT). Both RPM and TT profits are higher and aggregate welfare is lower than in a centralized supply chain (CSC). When customers know the inventory, RPM coincides with CSC. Thus, overestimation of customer awareness may lead to overcentralization of supply chains with profit loss comparable with the loss from strategic customers. The case of RPM with unknown inventory is extended to an arbitrary number of retailers with inventory‐independent and inventory‐dependent demand. In both cases, the manufacturer, by setting a higher wholesale price, mitigates the inventory‐increasing effect of competition and reaches the same profit as with a single retailer. The high viability and efficiency of RPM in using double marginalization as a strategic‐behavior‐mitigating tool may serve as another explanation of why manufacturers may prefer DSC with RPM to a vertically integrated firm.

Managerial Delegation with Vertical Structure: Linear Input Contract vs. Nash Bargaining

We examine that the bilateral supplier affects the incentive contracts that owners of retailers offer their managers. Thus, we compare the two models: (1) decentralized bargaining between manufacturers and retailers including two-part tariff contract (2) linear input pricing without bargaining. Contrast to previous studies, we find that the owner of retailer chooses no delegation under Cournot competition when offering linear input pricing, which implies that owners do not face a prisoners' dilemma situation and Pareto superior profit is obtained for retailers. Furthermore, in contrast to Scrimitore (2018), decentralized bargaining allows to equalize the equilibrium outcomes in the different delegation structure under both Bertrand and Cournot competition and leads the irrelevant result for the endogenous delegation problem.

Bertrand and Cournot Competition with Network Effects and Input Pricing Strategy

We revisit the endogenous choice of price or quantity made by two retailers in a vertical structure with a monopolistic manufacturer under network externalities when the retailers involve in centralized Nash bargaining with the two-part tariff contracts. When comparing integration to separation under Cournot and Bertrand competition, in contrast to conventional wisdom, we show that regardless of competition mode and the strength of network externalities, Pareto superiority can obtain under separation rather than under integration. Furthermore, we find the result that regardless of network externalities, Cournot emerges in equilibrium obtained under uniform input pricing, which is asserted to be in contrast with Basak and Wang (2016) showing that Bertrand emerges in equilibrium under discriminatory input pricing in the absence of network externalities. However, the irrelevance results hold in equilibrium: the levels of social welfare, retailers' and manufacturer's profits are equal irrespective of whether (i) input pricing strategy of the manufacturer with/without network externalities, or (ii) endogenous competition mode.

Contract Unobservability and Downstream Competition

In this paper, we consider a supply chain with a manufacturer and two retailers who are contracted through wholesale prices or two-part tariffs. We depart from the existing literature by assuming that contract terms between the manufacturer and a retailer are not observed by the rival retailer. While the existing literature typically assumes that they are common knowledge in the market, contract terms may not be observed by rival retailers under certain circumstances. This paper contributes to the literature by studying the effect of contract unobservability on supply chain performance. We use game theoretical methods to find the equilibrium. When there are multiple equilibria, we adopt passive beliefs as an equilibrium refinement criterion. We find that certain established results regarding observable supply chain contracts do not always apply when those contracts become unobservable to competing retailers. In particular, compared to when using two-part tariff contracts, the manufacturer may benefit from using wholesale price contracts when contract terms are unobservable. Moreover, the total industry profit may increase under wholesale price contracts. Our results offer an alternative explanation for the popularity of the wholesale price contracts and suggest that members of the supply chain must take unobservability into account when selecting the right contracts. We also offer new insights into buyback contracts and downstream mergers under unobservable contracts.

Contract design in a cross-sales supply chain with demand information asymmetry

We examine a supply chain with two manufacturers in which each manufacturer implements a cross-sales strategy by selling a substitutable product through two common retailers. Both retailers face uncertain demands, and their demand forecasts are private. The manufacturers, as Stackelberg leaders, can decide whether or not to acquire this private information from the retailers through contract design: either a wholesale price contract without information sharing, or a two-part tariff contract with information sharing. We derive the Bayesian–Nash equilibriums for contract choice. We find that the two-part tariff contract can be a dominant choice under certain conditions. Specifically, with a lump sum payment set by the two manufacturers, both manufacturers and retailers can benefit from a two-part tariff contract if product package substitutability is more intensive and the demand uncertainty level is relatively high, or if the product package competition is less intense. They do not benefit from the two-part tariff contract, however, if product package substitutability is more intense and the demand uncertainty is relatively low. In addition, by comparing to the case in which the demand is deterministic, we find that a two-part tariff contract with shared information is more likely to benefit both manufacturers and both retailers than a wholesale price contract without information sharing. The implications of the contract choices are discussed.

Impacts of returns policy under supplier encroachment with risk-averse retailer

This paper investigates the effects of consumer returns policy and retailer’s risk aversion on the behavior of supply chain members under supplier encroachment. We build a theoretical model of a dual-channel supply chain consisting of a risk-neutral supplier and a risk-averse retailer. Both channels provide consumer returns service. We thus examine the optimal pricing decisions for the supplier and the retailer and analyze the impacts of consumers’ sensitivity to returns policy on firms’ pricing strategies, product demands and the performance under retailer’s different risk attitudes. We also consider the role of competition when consumers facing multiple suppliers or multiple retailers. It is shown that when consumers are too sensitive to the returns policy, providing consumer returns policy may hurt the online demand and the total demand. An increased risk aversion level of retailer may lead to a smaller expect utility for the retailer while a larger profit for the supplier. Surprisingly, the number of retailers does not affect the optimal decisions, only affects the competitive retailers’ expected utility. Furthermore, we find that a two-part tariff contract could coordinate the supply chain under the supplier encroachment when both members are risk-neutral.

Simplicity is beauty: pricing coordination in two-product supply chains with simplest contracts under voluntary compliance

Pricing is an important topic in supply chains. In this paper, we explore the coordination challenge with the use of simplest contracts for the case with two products. To be specific, we consider a single-manufacturer single-retailer make-to-order supply chain. In the base model, we consider the case when the product demands are independent and derive the optimal pricing decisions under a decentralised setting. Comparing with the centralised setting, we show that double marginalisation in the decentralised setting reduces the supply chain efficiency by 25%. We then find that the simpler contracts such as the three-parameter two-part tariff (3P-TT) contract and the three-parameter revenue sharing (3P-RS) contract can coordinate the two-product supply chain. We extend the analysis in two cases: (i) the case when the products are substitutable and (ii) the case when the retailer is risk averse, and show that both the 3P-TT and 3P-RS contracts can coordinate the respective supply chain. We also find that the degrees of product substitution and retailer’s risk averse significantly influence the supply chain performance.

Welfare improving licensing with endogenous choice of prices versus quantities

This paper investigates the endogenous choice of prices versus quantities by taking into account patent licensing where the patent holder, which is itself a producer within the industry, licenses its cost-reducing innovation to the rival firm through a two-part tariff contract. For substitute products we find that both Cournot and mixed price-quantity competition may constitute the equilibrium outcomes, depending on the innovation size. Contrary to the results in Fauli-Oller and Sandonis (2002), we show that the optimal licensing contract definitely leads to an increase in social welfare. Our result reinforces the positive welfare effect of patent licensing.

Optimal Procurement Mechanisms for Assembly

This paper investigates mechanisms by which a powerful original equipment manufacturers procures multiple inputs for assembly from suppliers with privately informed costs, either simultaneously or sequentially. The optimal mechanisms always lead to matching purchase quantities of the inputs. Thus, quantity–payment contracts that implement the optimal mechanisms are contingent across suppliers (i.e., each supplier’s contract terms contain other suppliers’ private costs as variables), making the implementation impractical. To address this issue, we propose alternative implementations of the optimal mechanisms by menus of two-part tariff contracts that are noncontingent. In addition, optimal simultaneous and sequential procurement mechanisms for assembly are shown to be revenue-equivalent for all parties despite their different asymmetric information structures. Our findings suggest that procurement managers need not strategize contracting sequences for assembly, but should rather focus on achieving the best pricing with each supplier and coordinating purchase quantities.

Vertical Arrangements and Upstream Mergers

We study the incentives for horizontal upstream mergers in a quantity-setting vertically related industry, under bargain and endogenous contract types. We show that the contract types used could have important consequences for the equilibrium market structure and vice versa. If it is the retailers who choose contract types, they share the same preferences as the policymakers and choose to offer two-part tariff contracts, leading the suppliers not to merge. This result has some obvious policy implications. If it is the suppliers who decide contract types, they prefer to merge and offer a partial forward vertical ownership scheme. Under Bertrand competition, there is always an upstream merger, but the common manufacturer will offer a two-part tariff contract for intermediate bargain power levels. For high bargain power levels, he will choose a partial forward vertical ownership scheme, while for low bargain power will suffer from negative profits. A policymaker, considering the maximization of the social welfare should consider the upstream merger and two-part tariff contracts.

Decentralization versus coordination in competing supply chains under retailers’ extended warranties

This paper studies a two-tier duopoly competing supply chain system consisting of two manufacturers and two exclusive retailers. Both manufacturers produce differentiated products and both retailers provide extended warranties for the products they sell. Two types of channel-structure strategy options are considered: a decentralized structure with a wholesale price contract and a coordinated structure with a sophisticated contract. We first derive the equilibrium outcomes under three possible chain-to-chain competition scenarios. Subsequently, we reveal how manufacturers control their retail channels to gain more supply chain system profit under an interactive environment with supply chain competition and retailers’ extended warranties. We find that pure coordinated channel competition and pure decentralized channel competition may both reach equilibrium. Furthermore, the interaction forces of supply chain competition and extended warranty service significantly impact the characteristics of the equilibria. Finally, we analyze the competing supply chain’s coordination contract design by using the example of a two-part tariff contract, and determine the feasible contract parameter range that results in a win-win solution for supply chain members.

A reappraisal of strategic trade policies with the endogenous mode of competition under vertical structures

ABSTRACTThis paper examines the endogenous choice of competition mode with strategic export policies in vertically related markets when each upstream firm located in each country determines the terms of the two-part tariff contract by maximizing generalized Nash bargaining. We show that (i) choosing Cournot (Bertrand) competition is the dominant strategy for both downstream firms when goods are substitutes (complements), which leads Pareto superior regardless of the nature of goods under the optimal trade policies; (ii) irrespective of rival’s competition mode, the optimal trade policy is an export subsidy under Cournot competition and an export tax under Bertrand competition; and (iii) trade liberalization may give rise to changes of competition mode and increase of social welfare.

UPSTREAM INCENTIVES TO ENCOURAGE DOWNSTREAM COMPETITION IN A VERTICALLY SEPARATED INDUSTRY

We show in this paper that a dominant supplier, under observable two-part tariff contracts and an alternative, less efficient supply of the input, could benefit from more intense competition downstream provided that it has strong enough market power upstream. This implies that the incentives of upstream suppliers to foreclose downstream firms are less important than the previous literature had suggested. In fact, we find that the result also holds under observable linear contracts when we consider free entry in the downstream market.

Supply chain channel coordination with triple bottom line approach

In this paper, we explore coordination of a sustainable risk-neutral supply chain that faces greening effort dependent demand. We propose a framework for exclusive distribution of sustainability responsibilities in a decentralised setting. We classify decentralised supply chain according to distribution of responsibilities for greening and social efforts. Our study demonstrates that greening and social responsiveness indices simultaneously influence all optimal parameters of a supply chain. We analyse generalised wholesale price and linear two-part tariff contracts for dyadic supply chains with triple bottom line objective. We demonstrate that a decentralised supply chain can be coordinated when the supplier is socially responsible.

Technology transfer in prescription drug market

PurposeMany people in developing countries are suffering from serious diseases, such as HIV and tuberculosis. On the other hand, drug patents impact the availability of the drug for patients. Pharmaceutical technology transfer is widely used by domestic and foreign pharmaceutical enterprises because it promotes the availability of the drug for patients. The purpose of this paper, which is on drug technology transfer, is mainly to discuss how to solve the conflict between drug patent protection and public health from the perspective of the law, but not from the perspective of economics. To fill this gap, the authors introduce a model in the prescription drug market and analyze how a foreign manufacturer that produces brand name drugs authorizes a domestic enterprise that produces common drugs.Design/methodology/approachIn this paper, the authors consider a situation that if the patent holders are provided a certain amount of compensation, then whether compulsory licensing would be an effective tool to promote competition and improve the availability of drugs. Furthermore, they also consider three different cooperation mechanisms, namely, fixed-fee contract, royalty contract and two-part tariff contract, under the case of technology transfer and give the condition of which contract would be better under different scenarios.FindingsIt is found that the product differentiation and the agent behavior of doctor in the domestic market have a deep impact on the foreign enterprise’s decision on technology transfer. If both fixed-fee contract and royalty contract are permitted, foreign enterprise will choose different transfer contracts under different conditions. Under two-part tariff contract, it is equivalent to a fixed-fee or royalty contract under certain conditions. Furthermore, all contracts can improve patients’ benefits, while the royalty contract and the two-part tariff contract would reduce importer’s social welfare under certain conditions.Originality/valuePrescription drugs can treat many acute diseases and improve people’s quality of life. On the other hand, it requires investment in pharmaceutical research and development and is hard to afford the drug for the people living in poverty. This paper tries to solve the problem by introducing three cooperation contracts. The authors consider an innovative drug company and a regular drug company. The regular drug company can improve the quality of its drug by signing a technology transfer agreement with the innovative company. Three contracts are discussed in this paper; they are fixed-fee contract, royalty contract and two-part tariff contract. The authors examine the impact of different contracts on the companies’ profit, patients’ benefit and social welfare. It is found that quality differentiation of drugs and doctor behaviors can have large impacts on the company’s decision about technology adoption as well as contract choice strategies. In all of the three contracts, patients’ benefit improves, while the profit of the two companies and social welfare can increase or decrease under different contracts.

Reverse channel selection decisions with a joint third-party recycler

In recent years, Internet-based firms have been increasingly engaged in recycling used products, taking advantage of economies of scale by serving a number of manufacturers. However, most studies on the recycling channel of remanufacturing to date only consider the case of a single manufacturer in a closed-loop supply chain. To address this gap, we develop a Stackelberg game model and show that the joint third-party (J3P) collection mode serving multiple manufacturers may outperform individual retailer- and manufacturer-managed modes, as opposed to existing findings considering a single manufacturer. It is optimal for manufacturers to authorise a large-scale J3P to collect used products. In addition, we show that the J3P can design a two-part tariff contract for the manufacturers to overcome the double marginalisation and collective action problems in decentralised supply chains. Our results provide guidance for enterprises and the government on recycling decisions in the era of a network economy.

Green product supply chain contracts considering environmental responsibilities

Environmental sustainability has become an important metric for assessing the success of supply chain management. We study several cooperation contracts within a green product supply chain and investigate their environmental performance. Stakeholders’ environmental responsibilities are considered in a two-echelon supply chain in which consumers are environmentally conscious, a manufacturer designs and produces a green product, and a retailer promotes the green product in its marketplace through green marketing. This problem is analyzed and modeled under three contracts in order of increasing cooperation level: price-only, green-marketing cost-sharing, and two-part tariff contracts. The analytical results show that cooperation among partners can help the supply chain achieve environmental improvements. Cooperating contracts are valuable in practice because consumers are now paying more attention to sustainability and have become more environmentally conscious. A counterintuitive but interesting result is that cooperation may not always profitably benefit all partners; manufacturing becomes more profitable when the manufacturer shares the green-marketing cost with the retailer, whereas the retailer is worse off under the cost-sharing contract than under the price-only contract. This result is more significant when consumers’ green awareness increases. The results on social-welfare performance show that the supply chain’s social welfare increases with the increase of the supply chain’s cooperation level.

Joint Pricing and Product Carbon Footprint Decisions and Coordination of Supply Chain with Cap-and-Trade Regulation

The implementation of cap-and-trade regulation worldwide is bound to have some effects on supply chain decision-making. This paper investigates optimal pricing and product carbon footprint decisions of the supply chain consisting of a manufacturer and a retailer under cap-and-trade regulation by applying optimization and game theory. By comparing the optimal results between the centralized and decentralized decision-making models, we find that the optimal product carbon footprint and selling price not only depend on the carbon trading price and carbon cap allocated by the government, but also relate to the initial carbon footprint of the product and the decision-making methods in the supply chain. It is found that there is also a “double marginalization” in the decentralized situation, thus we coordinate the supply chain using a two-part tariff contract. Specifically, only the manufacturer adjusts dynamically the wholesale price and fixed fee within the coordinating contract according to different initial carbon footprint and the range of the carbon cap reduction by the government. Finally, we obtain several interesting conclusions from the numerical examples and provide managerial insights and policy implications from the analytical results.

The Effect of Marketing Effort on Dual-Channel Closed-Loop Supply Chain Systems

This paper explores a dual-channel closed-loop supply chain (CLSC) system consisting of a manufacturer and a retailer. The manufacturer is the CLSC Stackelberg leader. We investigate the effect of exerting marketing effort on the optimal decisions and profits of supply chain members by considering several marketing effort supported models, namely the models when the manufacturer is the investor, the retailer is the investor, and the centralized CLSC system, respectively. We propose a two-part tariff contract for coordinating the CLSC. We analytically reveal that the two-part tariff contract can coordinate the CLSC when the manufacturer is the investor but unable to coordinate supply chain when the retailer is the investor. Finally, we present the numerical analysis to uncover insights on how the consumers' preference toward the direct channel affects the optimal decisions in the dual-channel CLSC system.

Disclosure Regime and Bargaining in Vertical Markets

We consider the strategic implications of the disclosure regime of vertical contract terms by endogenizing them. The latter are exogenously set in the literature either as observable or as secret. By endogenizing the disclosure regime we show that the mode and intensity of the downstream competition, as well as the upstream market structure, play a significant role in the observability of the vertical contract terms. On the contrary, this decision is independent of the bargain power distribution or the product differentiation. When a common supplier bargains with each retailer over a two-part tariff contract, interim observability intensifies the commitment problem, by offering a wholesale price below the marginal cost. The same holds under linear contracts or Bertrand competition. On the other hand, under dedicated suppliers, it is more profitable to bargain over interim unobservable contracts and through them to alleviate the commitment problem. Policymakers could increase the social welfare by encouraging interim observability (unobservability) when firms compete in quantities (prices). Monopolized upstream markets are more prone to have aligned incentives with the policymakers, especially if the downstream retailers compete over quantities.