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Resale Price Maintenance with Strategic Customers
Author(s) -
Bazhanov Andrei,
Levin Yuri,
Nediak Mikhail
Publication year - 2019
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.12936
Subject(s) - supply chain , business , profit (economics) , resale price maintenance , tariff , industrial organization , microeconomics , product (mathematics) , marketing , commerce , economics , geometry , mathematics , international trade , incentive
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.