Manufacturer’s uniform pricing and channel choice with a retail price markup commitment strategy

Abstract

The paper studies channel choice decisions in a multi-channel supply chain under a strategy where there is an ex-ante commitment made on the retail price markup. The market demand is uncertain and dependent on the price and sales efforts. The results show that in any channel structure, when making order decisions the retailer only examines the price ratio and the fluctuation size of random demand, rather than the channel cost and the retailer’s marketing efficiency. When the retail price rises, the manufacturer is willing to increase inventory quantity for direct sales, because the manufacturer’s profit margin is higher in direct channel. The increase in demand fluctuation only affects the degree of channel preference but doesn’t change the manufacturer’s channel choice. No matter in which level the price ratio is, when the sales efficiency of retail channel is not high or the demand proportion of direct channel is low, the manufacturer and the retailer will be both apt to choose a dual-channel structure. Then adding a direct channel becomes a marketing strategy, rather than a competitor of the retail channel, and helps the supply chain win more market demand.

Keywords

Uniform pricing / marketing/sales effort / channel choice / newsvendor model / dual channel supply chain

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