/pdf/the-theory-of-industrial-organization-19bejph0ej.pdf

The Theory of Industrial Organization

Publisher Summary This chapter reviews the supply chain coordination with contracts. Numerous supply chain models are discussed. In each model, the supply chain optimal actions are identified. The chapter extends the newsvendor model by allowing the retailer to choose the retail price in addition to the stocking quantity. Coordination is more complex in this setting because the incentives provided to align one action might cause distortions with the other action. The newsvendor model is also extended by allowing the retailer to exert costly effort to increase demand. Coordination is challenging because the retailer's effort is noncontractible—that is, the firms cannot write contracts based on the effort chosen. The chapter also discusses an infinite horizon stochastic demand model in which the retailer receives replenishments from a supplier after a constant lead time. Coordination requires that the retailer chooses a large basestock level.

Supply Chain Coordination with Contracts

Under a revenue-sharing contract, a retailer pays a supplier a wholesale price for each unit purchased, plus a percentage of the revenue the retailer generates. Such contracts have become more prevalent in the videocassette rental industry relative to the more conventional wholesale price contract. This paper studies revenue-sharing contracts in a general supply chain model with revenues determined by each retailer's purchase quantity and price. Demand can be deterministic or stochastic and revenue is generated either from rentals or outright sales. Our model includes the case of a supplier selling to a classical fixed-price newsvendor or a price-setting newsvendor. We demonstrate that revenue sharing coordinates a supply chain with a single retailer (i.e., the retailer chooses optimal price and quantity) and arbitrarily allocates the supply chain's profit. We compare revenue sharing to a number of other supply chain contracts (e.g., buy-back contracts, price-discount contracts, quantity-flexibility contracts, sales-rebate contracts, franchise contracts, and quantity discounts). We find that revenue sharing is equivalent to buybacks in the newsvendor case and equivalent to price discounts in the price-setting newsvendor case. Revenue sharing also coordinates a supply chain with retailers competing in quantities, e.g., Cournot competitors or competing newsvendors with fixed prices. Despite its numerous merits, we identify several limitations of revenue sharing to (at least partially) explain why it is not prevalent in all industries. In particular, we characterize cases in which revenue sharing provides only a small improvement over the administratively cheaper wholesale price contract. Additionally, revenue sharing does not coordinate a supply chain with demand that depends on costly retail effort. We develop a variation on revenue sharing for this setting.

/pdf/supply-chain-coordination-with-revenue-sharing-contracts-3yw0dxmwvj.pdf

Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations

Recent research in information economics has focused on signals as mechanisms to solve problems that arise under asymmetric information. A firm or individual credibly communicates the level of some unobservable element in a transaction by providing an observable signal. When applied to conveying product quality information, this issue is of particular interest to the discipline of marketing. In this article, the authors focus on the ways a firm may signal the unobservable quality of its products through several marketing-mix variables. The authors develop a typology that classifies signals and discuss the available empirical evidence on the signaling properties of several marketing variables. They consider managerial implications of signaling and outline an agenda for future empirical research.

No Pain, No Gain: A Critical Review of the Literature on Signaling Unobservable Product Quality:

The Theory of Monopolistic Competition.

It is widely believed that a supplier who distributes her product through retailers can achieve the vertically integrated outcome with nonlinear contracts, provided the retail price is the only target of control and there is no uncertainty We show that this result fails when retailers cannot observe their rivals' contracts, as incentives to choose each contract to maximize bilateral profits may yield retail prices well below the vertically integrated level This provides a new explanation for vertical restraints, and it rationalizes an oft-expressed but never formalized view that resale price maintenance prevents countervailing buyer power from lowering retail prices

Vertical Control with Bilateral Contracts

With the advent of panel data on household purchase behavior, and the development of statistical procedures to utilize this data, firms can now target coupons to selected households with considerable accuracy and cost effectiveness. In this article, we develop an analytical framework to examine the effect of such targeting on firm profits, prices, and coupon face values. We also derive comparative statics on firms' optimal mix of offensive and defensive couponing, the number of coupons distributed, redemption rates, face values, and incremental sales per redemption. Among our findings: when rival firms can target their coupon promotions at brand switchers, the outcome will be a prisoner's dilemma in which the net effect of targeting is simply the cost of distribution plus the discount given to redeemers.

/pdf/competitive-coupon-targeting-27ehe3cdo7.pdf

Competitive Coupon Targeting

Producers in a perfectly competitive industry compete to obtain shelf space at the retail level. Barring contract observability problems, slotting allowances are observed in equilibrium. Producers charge a high wholesale price, but they give back their profits via up-front payments to retailers. However, if the individual supplier-retailer wholesale price terms are unobservable by competitors, then resale price maintenance will be seen, but the coverage will not be universal. The equilibria can be ranked by the usual social welfare criteria. Resale price maintenance, though worse than simple marginal cost wholesale pricing, yields greater surplus than the slotting allowance equilibrium.

/pdf/slotting-allowances-and-resale-price-maintenance-a-1bzr8ov6i4.pdf

Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices

One-to-one promotions are possible when consumers are individually addressable and firms know something about each customer's preferences. We explore the competitive effects of one-to-one promotions in a model with two competing firms where the firms differ in size and consumers have heterogeneous brand loyalty. We find that one-to-one promotions always lead to an increase in price competition (average prices in the market decrease). However, we also find that one-to-one promotions affect market shares. This market-share effect may outweigh the effect of lower prices, benefiting the firm whose market share increases. Our results suggest that of two firms, the firm with the higher-quality product may gain from one-to-one promotions. Our model also has implications for the phenomenon of customer churn, where consumers switch to a less preferred brand due to targeted promotional incentives. We show that churning can arise optimally from firms pursuing a profit-maximizing strategy. Instead of trying to minimize it, the optimal way to manage customer churn is to engage in both offensive and defensive promotions with the relative mix depending on the marginal cost of targeting.

https://www.simon.rochester.edu/fac/shaffer/Published/Competitive%20One%20to%20One.pdf

Competitive One-to-One Promotions

This article analyses the impact of retail mergers on product variety We show that, following a merger, a retailer may want to enhance its buyer power by committing to a 'single-sourcing'purchasing strategy Anticipating further concentration in the retail industry, suppliers will strategically choose to produce less differentiated products, which further reduces product variety If negotiations are efficient, the overall loss in product variety may reduce consumer surplus and total welfare With linear tariffs, however, there may be a countervailing effect as the more powerful retailer passes on lower prices to final consumers Â© 2007 The Author(s) Journal compilation Royal Economic Society 2007

https://papers.ssrn.com/sol3/Delivery.cfm/ecoj_2001.pdf?abstractid=958116&mirid=1

Greg Shaffer

Papers

Vertical Control with Bilateral Contracts

Competitive Coupon Targeting

Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices

Competitive One-to-One Promotions

Retail Mergers, Buyer Power and Product Variety*