Markup pricing strategies between a dominant retailer and competitive manufacturers

  • Authors:
  • Jian-Cai Wang;Ai-Min Wang;Yao-Yu Wang

  • Affiliations:
  • School of Management and Economics, Beijing Institute of Technology, Beijing, PR China;School of Mechanical Engineering, Beijing Institute of Technology, Beijing, PR China;Dongwu Business School, Soochow University, Suzhou, PR China and Center for Enterprise Innovation and Development, Soochow University, Suzhou, PR China

  • Venue:
  • Computers and Industrial Engineering
  • Year:
  • 2013

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Abstract

Markup pricing contracts have been widely employed in many industries. Under such contracts, a retailer charges a retail margin over the wholesale price levied by the supplier to guarantee her financial prudence. In a setting where two competitive manufacturers sell substitutable products through a common dominant retailer, we investigate and compare performance of two different markup arrangements, namely, percentage and dollar, under the deterministic and stochastic demand situations, respectively. We find that, no matter what the demand characteristic is, when the retailer switches from dollar to percentage markup, the retailer makes a higher profit while the manufacturers suffer, because the switching forces manufacturers charge lower wholesale prices and thus leads to lower retail prices. Moreover, under the deterministic demand situation, the switching brings about a larger order quantity and a higher channel profit. Under the stochastic demand situation, however, the effect of the switching on order quantity and channel profit depends on manufacturer differentiation and retailer efficiency: order quantity (channel profit) becomes smaller (lower), as manufacturer differentiation becomes weaker or retailer efficiency becomes higher. And, the demand uncertainty intensifies the effect.