Wholesale Price Discrimination Research Articles

Wholesale Price Discrimination and Contract Unobservability

This study examines how wholesale price discrimination (WD) by a supplier affects different parties in a supply chain involving a common supplier distributing homogeneous products through two competing retailers with different costs under wholesale price contracts. Especially, we allow for contract unobservability, where the contract terms between the supplier and each retailer are secret to the rival retailer. Intuitively, given the downstream asymmetry, WD should be more advantageous than the uniform wholesale price (UW) scheme for the supplier. This is true under observable contracts, as we show that WD benefits the supplier and less efficient retailer but hurts the more efficient retailer, supply chain, and consumers. Under unobservability, however, we find that the supplier may be better off by committing to UW. The intuition is that contract unobservability induces the supplier to set lower discretionary wholesale prices, which can outweigh the benefits of pricing flexibility. Consequently, a lack of commitment to UW can benefit both retailers, improve supply chain efficiency, and increase consumer surplus. Our findings suggest that policymakers should be cautious about imposing restrictions on WD. We also consider three extensions for robustness and offer new insights.

Research on Nash Equilibrium of Dual-Channel Supply Chain Based on Wholesale Price Discrimination and Sales Efforts

The progress of communication technology and the Internet has made the dual-channel supply chain have great development. Supply chain members have to compete and cooperate with other enterprises on the chain in order to obtain greater self-benefit. In the competitive-cooperative relationship among enterprises, price discrimination and sales effort are common tools of operation, and Nash equilibrium theory is a common strategy in the process of supply chain game. Whether manufacturers can promote retailers to implement sales efforts through price discrimination and ensure that the overall revenue of the supply chain is improved at the Nash equilibrium is great significance to both the supply chain and individual enterprises. This paper constructs a decentralized dual-channel supply chain mathematical model composed of an independent manufacturer, an offline retailer, and an online retailer, taking into account the impact of the offline retailer’s sales efforts on his demand and its positive external for the other channel. The revenue matrix of retailers’ decisions about whether or not to pay their sales efforts is built under the condition that manufacturers charge different wholesale prices to different retailers and solves the condition of every decision combination becoming the Nash equilibrium using the Nash equilibrium game theory. Finally, the optimal pricing strategy of the manufacturers is analysed to get the constraints of this dual-channel supply chain achieving Pareto improvement when manufacturer uses wholesale price discrimination strategy.

Regulating recommended retail prices

This paper analyses the effects of regulated recommended retail prices (RRPs). Such recommendations by manufacturers are non-binding in nature and thus retailers do not have to adhere to them. We look at regulations, similar to that by the Federal Trade Commission (FTC), requiring at least some sales to take place at RRPs. Such regulations were introduced with the aim of protecting consumers. In the absence of regulation an equilibrium exists where the manufacturer charges the same wholesale prices across retailers. We show that regulating RRPs enables manufacturers to commit to their unobserved contracts, creating an equilibrium with wholesale price discrimination. We find that such an equilibrium increases manufacturer’s profits, but harms retailers and consumers.

Impact of wholesale price discrimination on the profit of chain members under different channel power structures

The purpose of this paper is to investigate the impact of wholesale price discrimination by a manufacturer on the profitability of chain members in a Retailer—E-tailer dual-channel supply chain for different product categories based on their online channel preference. We have considered two distinct channel power structures in this study, i.e., (i) retailer has higher channel power than the e-tailer and (ii) e-tailer has higher channel power than the retailer. Game-theoretic models are developed to examine the competition between the retailer and e-tailer and to derive their optimal decisions under equal wholesale price strategy and discriminatory wholesale price strategy for the channel power structures considered. Further, a numerical example was employed to quantify the results and to capture the variation with respect to online channel preference of the product. We have found that discriminatory wholesale price strategy is the gainful strategy (i) for a manufacturer dealing with products having high online channel preference under retailer leader structure (ii) for the manufacturer dealing with products having low online channel preference under e-tailer leader structure. Equal wholesale price strategy is the gainful strategy (i) for a manufacturer dealing with products having low online channel preference under retailer leader structure and (ii) for a manufacturer dealing with products having high online channel preference under e-tailer leader structure. The study helps the manufacturers to maximize their profit by adopting the right wholesale price strategy considering the online channel preference of the product and the downstream channel power structure.

Impact of wholesale price discrimination by the manufacturer on the profit of supply chain members

PurposeThe purpose of this paper is to investigate the impact of wholesale price discrimination by a manufacturer in a retailer–e-tailer dual-channel supply chain for different product categories based on their online channel preference.Design/methodology/approachThis paper considers a dual-channel supply chain comprising of a retailer and an e-tailer engaged in competition. Game-theoretic models are developed to model the competition between the retailer and e-tailer and to derive their optimal price, optimal order quantity and optimal profit under (1) equal wholesale price strategy and (2) discriminatory wholesale price strategy. Further, a numerical example was employed to quantify the results and to capture the variation with respect to online channel preference of the product.FindingsIt is beneficial for the manufacturer to adopt a discriminatory wholesale price strategy for products having both high online channel preference and low online channel preference. However, equal wholesale price strategy is beneficial for the e-tailer and the retailer in the case of products having high online channel preference and in the case of products having low online channel preference, respectively.Practical implicationsThe study helps the manufacturers to maximize their profit by adopting the right wholesale price strategy considering the online channel preference of the product when the manufacturers are supplying to heterogeneous retailers.Originality/valueThere is scant literature on the wholesale price strategy of the manufacturer considering the heterogeneous downstream retailers. This paper contributes the literature by bridging this gap. In addition, the study establishes a link between the wholesale price strategy and online channel preference of the product.

Endogenous timing and manufacturer advertising: A note

AbstractWe consider a vertical market comprising of a manufacturer engaging in advertising and two retailers offering differentiated products. We analyze the endogenous order of moves for the retailers and demonstrate that they may choose a more competitive environment: simultaneous pricing under Bertrand competition or sequential producing under Cournot competition. This result is robust even if we extended our model to third‐degree wholesale price discrimination and persuasive advertising.

Search and Wholesale Price Discrimination

AbstractFirms often choose not to post prices in wholesale markets, and buyers must incur costs to discover prices. Inspired by evidence of customized pricing (e.g., some customers pay up to 70% more than others) and search costs, I estimate a search model to study how personalized pricing impacts efficiency in a wholesale market. I find that price discrimination decreases total surplus by 11.6% and increases the sellers' profits by up to 52.1%. These effects are partially explained by price discrimination softening competition through a decrease in search incentives, illustrating how price discrimination may magnify the efficiency costs of search frictions.

Wholesale Price Discrimination in Global Sourcing

Problem definition : We investigate wholesale price discrimination in a global sourcing marketplace. Academic/practical relevance : Previous research has found price discrimination in business-to-consumer markets, in which buyers are end customers. There is limited research on suppliers’ price-quoting behaviors and price discrimination in business-to-business (B2B) markets. It is unclear whether certain characteristics of B2B buyers, who are often representatives of firms and not end customers, would influence suppliers’ pricing decisions. Methodology : We collaborate with a global trading company that runs a field experiment on a B2B platform. Results : We find that there is no significant difference in the wholesale prices quoted to buyers selling in U.S. and South African markets. We also find that suppliers quote significantly higher wholesale prices to white buyers than to Asian and black buyers regardless of country. However, price discrimination disappears when buyers present market information to suppliers, providing the lowest wholesale price offered by other suppliers in the market, whereas price discrimination remains when buyers present social information to suppliers, thereby indicating the buyer is referred by a previous customer. In addition, we show that market information can help buyers obtain a lower wholesale price because it signals a lower willingness to pay. Social information, however, can reduce price quotes for only black and white buyers but not for Asian (particularly Chinese) buyers. Managerial implications : Our work can provide guidance to suppliers’ pricing strategies, buyers’ inquiry strategies, and B2B platforms’ information strategies to attract and retain users.

Wholesale Price Discrimination in Global Sourcing: Field Evidence from Alibaba

Previous research has found price discrimination in business-to-consumer (B2C) markets, where buyers are end customers. There is limited research on suppliers' price-quoting behaviors and price discrimination in business-to-business (B2B) markets. It is unclear whether certain characteristics of B2B buyers, who are often representatives of firms and not end customers, would influence suppliers' pricing decisions. In this research, we study wholesale price discrimination by collaborating with a global trading company that runs a field experiment on a global sourcing marketplace. We find that there is no significant difference in the wholesale prices quoted to buyers selling in US and South African markets. We also find that suppliers quote significantly higher wholesale prices to White buyers than to Asian and Black buyers, regardless of country. However, price discrimination disappears when buyers present market information to suppliers, providing the lowest wholesale price offered by other suppliers in the market, whereas price discrimination remains when buyers present social information to suppliers, thereby indicating the buyer is referred by a previous customer. In addition, we show that market information can help buyers obtain a lower wholesale price because it signals a lower willingness to pay. Social information, however, can reduce price quotes for only Black and White buyers, but not for Asian (particularly Chinese) buyers.

Wholesale price discrimination: Innovation incentives and upstream competition

AbstractIn intermediate good markets where there are alternative supply sources, wholesale price discrimination may enhance innovation incentives downstream. We consider a vertical chain where a dominant firm and a competitive fringe supply imperfect substitutes to duopoly retailers which carry both varieties. We show that a ban on price discrimination by the dominant supplier makes uniform pricing credible and reduces retailers’ incentives to decrease the cost of acquiring the competitively supplied variety, leading to higher upstream profits and lower downstream welfare. Our analysis complements existing results by identifying a novel channel through which wholesale price discrimination can improve dynamic market efficiency.

Ladder Pricing – A New Form of Wholesale Price Discrimination

Wholesale ‘ladder pricing’ involves setting the wholesale price a retailer faces as a non-linear (generally increasing) function of the price chosen by that retailer. The special case where the ladder-pricing contract is linear is shown to be equivalent to a form of revenue sharing. Optimal profit maximizing ladder pricing/revenue sharing is examined, given that retailers are privately informed of their demands and costs, and have control over whether they participate, and if so, what retail price they set. The profit performance of the solution is compared with the alternative of wholesale quantity discounting, as the relative level of retailer demand/cost heterogeneity is varied; ladder pricing/revenue sharing tends to outperform quantity discounting by an increasing amount the greater retailer demand heterogeneity is relative to cost heterogeneity. Ladder pricing has recently been implemented for 08 and related calls in UK telecoms and has been subject to extended legal dispute; the case and issues involved are discussed.

Wholesale price discrimination with interdependent retailers

This paper examines the relationship between one manufacturer and two retailers who sell a product on their downstream markets. If a retailer invests in activities that enhance demand and, for example, improve the perceived image of the product, he or she might attract more customers, as well as increase the sales volumes of other retailers. In such a situation, free rider problems arise between the retailers, which finally lead to reduced sales efforts. We show that for linear wholesale prices, the manufacturer's pricing strategy depends on the retailers' investment costs and derive conditions for the optimality of wholesale price discrimination. We find that for low and high costs the manufacturer charges the retailers identical wholesale prices and thus does not have to bear any agency costs due to free riding. In all other cases, the manufacturer mitigates this problem by engaging in wholesale price discrimination. Our results indicate why it might make sense for a manufacturer to charge different wholesale prices even when the retailers have equal cost structures, market conditions, and investment options.

An empirical investigation of the welfare effects of banning wholesale price discrimination

Economic theory does not provide sharp predictions on the welfare effects of banning wholesale price discrimination: if downstream cost differences exist, then discrimination shifts production inefficiently, toward high‐cost retailers, so a ban increases welfare; if differences in price elasticity of demand across retailers exist, discrimination may increase welfare if quantity sold increases, so a ban reduces welfare. Using retail prices and quantities of coffee brands sold by German retailers, I estimate a model of demand and supply and separate cost and demand differences. Simulating a ban on wholesale price discrimination has positive welfare effects in this market, and less if downstream cost differences shrink, or with less competition.

Private Labeling and Competition between Retailers

This paper studies the effect of private labeling on retailer competition -an issue neglected in literature until now. Once implemented, private labeling may well be less favorable to society than previously thought because it can encourage consolidation of the retail industry. Either with linear pricing (when goods are not loose substitutes) or with wholesale price discrimination (when goods are not loose substitutes), the vertical channel is inclined to promote a retail monopoly while consumers prefer some retail competition. This conflict of interest would not arise in the absence of private labeling.

Wholesale Price Discrimination and Parallel Imports

We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets integrated at the distributor level by parallel imports (PI). In this context we show that if competition policy requires uniform wholesale prices across locations it would push retail prices toward convergence as transportation costs fall. However, these retail prices could be higher than those induced without restrictions on prices charged to distributors. Thus, the competition policy may not be optimal for consumer welfare.

Wholesale Price Discrimination and Parallel Imports

We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets integrated at the distributor level by parallel imports (PI). In this context we show that if competition policy requires uniform wholesale prices across locations it would push retail prices toward convergence as transportation costs fall. However, these retail prices could be higher than those induced without restrictions on prices charged to distributors. Thus, the competition policy may not be optimal for consumer welfare.

Wholesale Price Discrimination: Inference and Simulation

This paper makes inferences about wholesale price discrimination and uniform wholesale pricing policy in a national grocery retail market where wholesale price discrimination occurs. I estimate demand and a supply model of multiple retailers’ and manufacturers’ oligopoly-pricing behavior where manufacturers may engage in wholesale price discrimination, which allows me to recover brand level marginal costs in this market. Then I simulate the welfare effects of no wholesale price discrimination via uniform price regulation given observed data on retail and input prices and retail quantities sold and not available data on wholesale prices. This approach uses retail level scanner data on coffee produced by multiple manufacturers sold at the largest retail outlets in Germany. The estimates of uniform wholesale pricing in this market suggest there to be positive welfare effects from preventing wholesale price discrimination, originating from positive effects on consumer surplus of the same magnitude as on joint vertical producer surplus. I show through simulations that estimated welfare decreases, due to higher retail prices under no wholesale price discrimination, for more collusive retail and manufacturer counterfactual scenarios. Finally, and in terms of counterfactual demand simulations, I find that banning wholesale price discrimination may be actually welfare improving the less heterogeneous and the more elastic demand is.

Why Should Manufacturers Want Fair Trade?

A LONG-STANDING puzzle to economists is that some manufacturers prefer that their products are sold at not less than "fair trade" retail prices.' Before the courts upset the legal status of resale price maintenance, some of these manufacturers spent millions to prevent distributors from selling their products below the list price. The manufacturers' interests seem to be best served when distributors resell their products under such competitive conditions as may exist at the level of distribution and at the lowest prices resulting from that competition. If manufacturers set a floor to the resale price then they also set a ceiling to their sales and thus apparently support a policy that runs counter to their own self-interest. Let the manufacturers fix a price at the factory gate at which all distributors may buy the product. Would not the manufacturers' sales and profits be greater the lower is the price at which distributors resell their products to consumers? If so, then what explains the strong desire of some manufacturers to prevent distributors from