The Value of Commitments When Selling to Strategic Consumers: A Supply Chain Perspective

51 Pages Posted: 30 Sep 2017 Last revised: 9 Aug 2018

See all articles by Mustafa Kabul

Mustafa Kabul

SAS Institute Inc.

Ali K. Parlakturk

University of North Carolina (UNC) at Chapel Hill - Operations Area

Date Written: July 25, 2018

Abstract

We consider a decentralized supply chain consisting of a retailer and a supplier that serves forward-looking consumers in two periods. In each period, the supplier and the retailer dynamically set the wholesale and retail price to maximize their own profits. The consumers are heterogeneous in their evaluations of the product and are strategic in deciding whether and when to buy the product, choosing the option that maximizes their utility, including waiting for a price mark-down. We derive the equilibrium and study the value of price and quantity commitments from both the retailer’s and the supplier’s perspective. We find that, while a centralized system always benefits from making price and quantity commitments, this is not true for a firm in a decentralized supply chain due to how the other firm responds to these commitments. We show that the retailer suffers from making a price or quantity commitment and that, similarly, the supplier does not benefit from making a price commitment. In these cases, commitments can harm not only the firm itself but also profitability of the other firm in the supply chain, thereby disadvantaging the entire supply chain. This happens because such commitments aggravate double-marginalization inefficiency in the supply chain. Furthermore, we show eliminating this inefficiency through a coordinating contract (e.g., a two part tariff or quantity discount) makes commitments beneficial.

Keywords: Strategic Customer Behavior, Dynamic Pricing, Decentralization, Coordination

Suggested Citation

Kabul, Mustafa and Parlakturk, Ali K., The Value of Commitments When Selling to Strategic Consumers: A Supply Chain Perspective (July 25, 2018). Kenan Institute of Private Enterprise Research Paper No. 18-17, Available at SSRN: https://ssrn.com/abstract=3044748 or http://dx.doi.org/10.2139/ssrn.3044748

Mustafa Kabul

SAS Institute Inc. ( email )

100 SAS Campus Drive
Cary, NC 27513-2414
United States

Ali K. Parlakturk (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Operations Area ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States
(919) 962-3181 (Phone)

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