The Impact of Product Returns and Retailer's Service Investment on Manufacturer's Channel Strategies*

We study the distribution channel decision of a manufacturer who considers whether to add an online channel (direct channel) to its brick‐and‐mortar retailer (indirect channel). The retailer faces the opportunity to invest in store assistance to help consumers choose products and thus reduce product returns. Special attention is given to the impact of product returns and retailer's store assistance investment on manufacturer's dual channel decision. We examine conditions under which the manufacturer uses dual channels and how various relevant factors affect its channel decision under two settings, depending on whether the retailer has its own online store or not. When the retailer does not have its online store, we find that (i) the addition of the direct channel raises the wholesale price; (ii) the direct channel addition hurts the retailer if the nonreplacement rate is low; (iii) the manufacturer has a lower incentive to add the direct channel when the retailer's service cost is lower or its returns reduction rate from service investment is higher; and (iv) the manufacturer should treat its own returns handling cost as a key factor in its channel structure decision. In addition, when the retailer operates an online store, we find that the manufacturer may have an incentive to add a direct channel such that both firms own direct channels.     

Differential Pricing for Information Sharing Under Competition

We consider a two‐echelon supply chain with a manufacturer supplying to multiple downstream retailers engaged in differentiated Cournot competition. Each retailer has private information about uncertain demand. The manufacturer is the Stackelberg leader who sets the contract terms with the retailers, and benefits from retailers sharing their private information. When all retailers are given the same wholesale price, truthful information sharing is not an equilibrium outcome. We propose two variants of differential pricing mechanisms that induce truthful information sharing by all retailers. The first variant rewards a retailer for providing optimistic information and achieves truthful information sharing as a unique equilibrium. The differential pricing mechanism is optimal in the class of linear‐price, incentive‐compatible, direct mechanisms. The second variant, which incorporates provision for a fixed payment in addition to wholesale prices, preserves all the equilibrium properties of the first variant and additionally “nearly coordinates” the supply chain. Our analysis of differential pricing with a fixed payment provides interesting observations regarding the relationship between product substitutability, number of retailers, information precision, and market power. As products become closer substitutes and/or number of retailers increase, the manufacturer's market power increases, enabling her to extract a larger fraction of the supply chain surplus.     

Implications for the Role of Retailers in Quality Assurance

We investigate a manufacturer–retailer channel to explore the role of a retailer in assuring the quality of a manufacturer's product as a quality gatekeeper. Such a gatekeeping activity can entail a reduction in the defective rate for consumers, if the retailer charges the manufacturer a penalty for each identified defect that is no smaller than the market penalty for an unidentified defect. As a result of the retailer's gatekeeping, the change in the negotiated wholesale price only depends on the manufacturer's individual benefit, whereas the change in the retailer's optimal retail price is associated with the channel‐wide benefit. When the impact of quality relative to retail price on demand is higher, the retailer benefits more from her gatekeeping activity, thus having a greater incentive to take on the quality gatekeeping responsibility. Moreover, the retailer's gatekeeping generates a larger increase in the demand as well as each firm's profit, when the retailer has a stronger relative bargaining power.     

On pricing and protection of complementary products

The business literature advises firms producing complementary products to sell the core product at a low price, but to price the complementary product at a higher premium. This strategy, however, is problematic if firms face competitors in the market for complementary products as well, as observed in recent years for instance in the market for printers/ink cartridges. Motivated by several measures the firms have taken in this market, the current paper analyzes whether firms are interested in protecting their complementary product from outside competition. We find that firms protect their products only if consumers underestimate the demand for the complementary product when deciding which core product to buy. Moreover, we investigate how the decision to protect the complementary product interacts with a firm’s pricing decision. We show that the price policy proposed in the business literature should only be applied, if consumers sufficiently underestimate their demand for the complementary product so that firms strongly protect these products from outside competition.     

Should an OEM Retain Component Procurement when the CM Produces Competing Products?

We consider a large original equipment manufacturer (OEM) who relies on a contract manufacturer (CM) to produce her product. In addition to the OEM's product, the CM also produces for a smaller OEM. Both the larger OEM and the CM can purchase the component from the supplier, but their purchase prices may differ and remain unknown to each other. The main question we address is whether the larger OEM should retain component procurement by purchasing components from the supplier and reselling to the CM (buy–sell), or outsource component procurement by letting the CM purchase directly from the supplier (turnkey). We show that, under buy–sell, the larger OEM's optimal strategy is to resell components at the highest possible component purchase price of the CM (i.e., the street price). By comparing buy–sell and turnkey, we find that a CM with low component price is better off under turnkey, even though under buy–sell he receives more profits through the products sold to the smaller OEM. Furthermore, the larger OEM's preference between buy–sell and turnkey depends on her component price, the volatility of the CM's component price and substitutability between the two products.     

Quick Response under Competition

We consider a manufacturer serving two competing retailers that sell their products over a single selling season. The retailers place their regular orders before the season starts. In addition to this initial order, quick response (QR) provides a retailer with an additional replenishment opportunity after demand uncertainty is resolved. The manufacturer determines the unit price for QR replenishment. We characterize the retailers’ ordering, and the manufacturer's pricing decisions in equilibrium when none, only one, and both of the retailers have QR ability. We study how the profitability of the manufacturer, the retailers, and the channel depend on QR and competition. We find it may be optimal for the manufacturer to offer QR to only one of the ex ante identical retailers when demand variability is sufficiently, but not overly high. The manufacturer may also find it optimal to offer QR to both or none of the retailers, depending on demand variability. Finally, while QR ability is always attractive for a retailer when competition is ignored, we find QR may prove detrimental when its impact on competition is taken into account.     

A Model for Partial Product Complementarity and Strategic Production Decisions under Demand Uncertainty

This paper considers a general industrial setting where multiple manufacturers each produce a different product and sell it to the markets. These products are partially complementary in the sense that there is a common demand stream that requests all these products as complementary sets and there are streams of individual demands each requesting only one of the products. All demands are uncertain and may follow any general, joint distributions. Facing demand uncertainties, the manufacturers each choose a production quantity for its product with an objective to maximize its own expected profit. We formulate the problem as a non‐cooperative game to study the strategic interactions of such firms and their implications to supply chain performance. We show that such a game may have numerous equilibria. Among all the possible equilibria, however, we prove that there always exists a unique one that maximizes each and every manufacturer's profit, and we derive an explicit solution for this Pareto‐optimal equilibrium point. We further study the optimal solution for a centralized system and compare it with the decentralized solution. Managerial insights are drawn as to how system parameters and control mechanisms affect firms' decisions and performance.     

Channel Structure Design for Complementary Products under a Co‐Opetitive Environment

In the high‐tech industry, firms can be partners in one respect (e.g., resellers) and competitors in another. In this article, we investigate the channel structure problem for two firms‐each selling competing products in two complementary markets—who are deciding whether to sell their products to customers directly or distribute one of them through a competitor. The customers are heterogeneous and both firms have products that are horizontally differentiated. When selling products directly, the firm can coordinate the prices of the two complementary products and avoid the inefficiency of double marginalization. However, selling (indirectly) through the competing manufacturer can mitigate competition because the competitor shares the profit of both competing products and therefore does not price its own products aggressively. One might expect that when the externality across the markets is strong, firms would prefer to sell both products directly (rather than through the competitor) in order to take advantage of the complementarity between markets and eliminate the inefficiency of double marginalization. Interestingly, we find that even though the first mover chooses to sell both products directly, the second mover forsakes the opportunity to coordinate the prices of its products and instead opts to distribute one of the products through the first mover.     

Entry Deterrence of Capacitated Competition Using Price and Non‐Price Strategies

We analyze the role of pricing and branding in an incumbent firm's decision when facing competition from an entrant firm with limited capacity. We do so by studying two price competition models (Stackelberg and Nash), where we consider the incumbent's entry‐deterrence pricing strategy based on a potential entrant's capacity size. In an extension, we also study a branding model, where the incumbent firm, in addition to pricing, can also invest in influencing market preference for its product. With these models, we study conditions under which the incumbent firm may block the entrant (i.e., prevent entry without any market actions), deter the entrant (i.e., stop entry with suitable market actions) or accommodate the entrant (i.e., allow entry and compete), and how the entrant will allocate its limited capacity across its own and the new market, if entry occurs. We also study the timing difference between the two different dynamics of the price competition models and find that the incumbent's first‐mover advantage benefits both the incumbent and the entrant. Interestingly, the entrant firm's profits are not monotonically increasing in its capacity even when it is costless to build capacity. In the branding model, we show that in some cases, the incumbent may even increase its price and successfully deter entry by investing in consumer's preference for its product. Finally, we incorporate demand uncertainty into our model and show that the incumbent benefits from demand uncertainty while the entrant may be worse off depending on the magnitude of demand uncertainty and its capacity.     

Optimal Contract Design for Mixed Channels Under Information Asymmetry

The mixed‐channel model is becoming increasingly popular in the marketplace. In this model, a firm selling through the traditional supply chain of wholesaler and retailer opens a direct channel to the customer through Internet sales. Because both channels have their respective advantages, the manufacturer is attracted to this business model. However, it also leads to channel conflict, with the retailer feeling threatened by direct competition. One way of eliminating the possibility of this channel conflict, where the retailer is allowed to add value to the product to differentiate its offering to the customers, is proposed in this paper. The retailer is also given full authority to make pricing decisions. This paper presents a model, under this scenario, of obtaining optimum pricing decisions by both parties, the amount of value added by the retailer, and the manufacturer's wholesale price to the retailer. Our model incorporates information asymmetry, where the manufacturer has incomplete information about the retailer's cost of adding value. We obtain closed‐form contracts with incomplete information and compare them with those with complete channel coordination. We also develop a number of managerial guidelines and identify future research topics.     

Price Incentives and Coordination in a Two‐Product Decentralized Supply Chain

We investigate pricing incentives for competing retailers who distribute two variants of a manufacturer's product in a decentralized supply chain. Under a two‐dimensional Hotelling model, we derive decentralized retailers' prices for the products, and distortions in pricing when compared to centrally optimal prices. We show that price distortions decrease as consumers' travel cost between retailers increases, due to less intense competition. However, price distortions do not change monotonically in consumers' switching cost between products within stores. To fix decentralized retailers' price distortions, we construct a two‐part pricing contract that coordinates the supply chain. We show that the coordinating contract is Pareto‐improving and analyze increase in the supply chain profit under coordination.     

Pricing Policy in a Supply Chain: Negotiation or Posted Pricing

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

消费者异质性下供应链互补产品销售策略选择及其定价研究

基于消费者对互补品消费习性存在的异质性,对互补品消费市场进行细分,并在上游两个制造商分别提供具有互补特性的产品,下游一个销售商同时销售这两种产品的供应链环境下研究定价均衡。根据不同目标市场选择,识别出全市场覆盖以及聚焦细分市场两种销售策略,分别对两种营销策略下的供应链产品定价进行讨论,并通过模型求解分别得到两种策略下的均衡,讨论了两个均衡解存在的条件,讨论了均衡定价随产品互补程度以及互补品相对效用比的变化情况,以及销售商在不同情形下选择的定价策略。结果表明,当互补品相对效用差异不大,且互补程度不大的时候,渠道内形成第一个定价均衡;当产品间相对效用差异大,且互补程度足够大的时候,渠道内形成第二个定价均衡。     

Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics

Gray markets, also known as parallel imports, have created fierce competition for manufacturers in many industries. We analyze the impact of parallel importation on a price‐setting manufacturer that serves two markets with uncertain demand, and characterize her policy against parallel importation. We show that ignoring demand uncertainty can take a significant toll on the manufacturer's profit, highlighting the value of making price and quantity decisions jointly. We find that adjusting prices is more effective in controlling gray market activity than reducing product availability, and that parallel importation forces the manufacturer to reduce her price gap while demand uncertainty forces her to lower prices. Furthermore, we explore the impact of market conditions (such as market base, price sensitivity, and demand uncertainty) and product characteristics (“fashion” vs. “commodity”) on the manufacturer's policy towards parallel importation. We also provide managerial insights about the value of strategic decision‐making by comparing the optimal policy to the uniform pricing policy that has been adopted by some companies to eliminate gray markets entirely. The comparison indicates that the value of making price and quantity decisions strategically is highest for moderately different market conditions and non‐commodity products.     

Role of Random Capacity Risk and the Retailer in Decentralized Supply Chains with Competing Suppliers

This research considers a supply chain under the following conditions: (i) two heterogeneous suppliers are in competition, (ii) supply capacity is random and pricing is endogenous, (iii) consumer demand, with and without an intermediate retailer, is price dependent. Specifically, we examine how uncertainty in supply capacity affects optimal ordering and pricing decisions, supplier and retailer profits, and the incentives to reduce such uncertainty. When two suppliers sell through a monopolistic retailer, supply uncertainty not only affects the retailer's diversification strategy for replenishment, but also changes the suppliers’ wholesale price competition and the incentive for reducing capacity uncertainty. In this dual‐sourcing model, we show that the benefit of reducing capacity uncertainty depends on the cost heterogeneity between the suppliers. In addition, we show that a supplier does not necessarily benefit from capacity variability reduction. We contrast this incentive misalignment with findings from the single‐supplier case and a supplier‐duopoly case where both suppliers sell directly to market without the monopolistic retailer. In the latter single‐supplier and duopoly cases, we prove that the unreliable supplier always benefits from reducing capacity variability. These results highlight the role of the retailer's diversification strategy in distorting a supplier's incentive for reducing capacity uncertainty under supplier price competition.     

中小制造企业在线直销与传统分销双渠道定价决策研究

针对传统渠道中处于非主导地位的中小制造企业开展双渠道销售时存在的价格冲突问题,考虑产品数字属性对渠道需求的影响,构建了制造商与零售商独立决策和制造商占非主导地位两种情况下的双渠道定价决策模型,给出了两种情况下的双渠道最优定价,并分别考察了产品数字属性变化以及决策权利结构不同对最优定价的影响。研究结果表明,处于非主导地位的中小制造企业应采用依从强势零售商的定价策略,该策略有利于制造商和零售商以及渠道整体收益的增加;随着产品数字属性的增大,制造商的最优定价相应地提高,而零售商的最优定价则相应地降低;制造商占非主导地位时的双渠道最优定价高于制造商与零售商独立决策时的双渠道最优定价。     

Implications of Channel Structure and Operational Mode Upon a Manufacturer's Durability Choice

Motivated by the observation that durability ratings of automobile manufacturers are not necessarily linked to the proportion of leasing but tend to decrease with the density of their dealer networks, we explore the interactions between channel structure (direct interaction with consumers vs. through an intermediary(ies)) and mode of operations (leasing vs. selling) and their implications for a manufacturer's willingness to invest in making her product more durable. Using a manufacturer who leases her product directly to consumers as a point of reference, we find that an isolated change in either the channel structure (selling through an intermediary), or the operational mode (leasing to selling) can decrease the manufacturer's willingness to provide durability. However, if combined, these two changes together may strengthen the manufacturer's willingness to invest in durability. Specifically, the traditional result that a manufacturer who leases provides more durability than one who sells, can be reversed in a decentralized channel.     

Measuring the Impact of Increased Product Substitution on Pricing and Capacity Decisions Under Linear Demand Models

We consider two substitutable products and compare two alternative measures of product substitutability for linear demand functions that are commonly used in the literature. While one leads to unrealistically high prices and profits as products become more substitutable, the results obtained using the other measure are in line with intuition. Using the more appropriate measure of product substitutability, we study the optimal investment mix in flexible and dedicated capacities in both monopoly and oligopoly settings. We find that the optimal investment in manufacturing flexibility tends to decrease as the products become closer substitutes; this is because (1) pricing can be used more effectively to balance supply and demand, and (2) the gains obtained by shifting production to the more profitable product are reduced due to increased correlation between the price potentials of the substitutable products. The value of flexibility always increases with demand variability. We also show that, as long as the optimal investments in dedicated capacity for both products are positive, the optimal expected prices and production quantities do not depend on the cost of the flexible capacity. Manufacturing flexibility simply allows the firm to achieve those expected values with lower capacity, while leading to higher expected profits.     

Dynamic Pricing,Production, and Channel Coordination with Stochastic Learning

We consider a decentralized two‐period supply chain in which a manufacturer produces a product with benefits of cost learning, and sells it through a retailer facing a price‐dependent demand. The manufacturer's second‐period production cost declines linearly in the first‐period production, but with a random learning rate. The manufacturer may or may not have the inventory carryover option. We formulate the resulting problems as two‐period Stackelberg games and obtain their feedback equilibrium solutions explicitly. We then examine the impact of mean learning rate and learning rate variability on the pricing strategies of the channel members, on the manufacturer's production decisions, and on the retailer's procurement decisions. We show that as the mean learning rate or the learning rate variability increases, the traditional double marginalization problem becomes more severe, leading to greater efficiency loss in the channel. We obtain revenue sharing contracts that can coordinate the dynamic supply chain. In particular, when the manufacturer may hold inventory, we identify two major drivers for inventory carryover: market growth and learning rate variability. Finally, we demonstrate the robustness of our results by examining a model in which cost learning takes place continuously.     

The Interplay between Information Acquisition and Quality Disclosure

This study investigates the interactions between a manufacturer's information acquisition and quality disclosure strategies in a supply chain setting in which the manufacturer privately knows his product quality but is uncertain about consumer preferences. We argue that the manufacturer should treat his information acquisition and quality disclosure decisions as an integrated process because these decisions can significantly influence a retailer's rational inferences about product quality and can have conflicting effects on his own profitability. Although information acquisition helps a manufacturer subsequently craft better pricing and quality disclosure strategies, it also leaks certain product information to the retailer, thus helping the retailer better estimate product quality. Therefore, in equilibrium, a manufacturer may choose not to acquire any consumer information, even when such acquisition is costless. Moreover, we find that this adverse effect of acquisition is highly dependent on the cost of disclosure and consumers’ preference differentiation. Increased consumer preference differentiation may have a non‐monotonic relationship with the manufacturer's profit, and information acquisition can become detrimental to the manufacturer once the disclosure cost is sufficiently high.