Wholesale Price Discrimination and Contract Unobservability

Production and Operations Management, Forthcoming

35 Pages Posted: 16 Apr 2024

See all articles by Shengming Zheng

Shengming Zheng

International Institute of Finance, School of Management, University of Science and Technology of China

Quan Zheng

University of Science and Technology of China - School of Management

Asoo Vakharia

University of Florida - Warrington College of Business Administration

Date Written: March 27, 2024

Abstract

This study examines how wholesale price discrimination (WD) by a supplier affects different parties in a supply chain involving a common supplier distributing homogeneous products through two competing retailers with different costs under wholesale price contracts. Especially, we allow for contract unobservability, where the contract terms between the supplier and each retailer are secret to the rival retailer. Intuitively, given the downstream asymmetry, WD should be more advantageous than the uniform wholesale price (UW) scheme for the supplier. This is true under observable contracts, as we show that WD benefits the supplier and less efficient retailer but hurts the more efficient retailer, supply chain, and consumers. Under unobservability, however, we find that the supplier may be better off by committing to UW. The intuition is that contract unobservability induces the supplier to set lower discretionary wholesale prices, which can outweigh the benefits of pricing flexibility. Consequently, a lack of commitment to UW can benefit both retailers, improve supply chain efficiency, and increase consumer surplus. Our findings suggest that policymakers should be cautious about imposing restrictions on WD. We also consider three extensions for robustness and offer new insights.

Keywords: contract unobservability, wholesale price discrimination, supply chain, regulation

Suggested Citation

Zheng, Shengming and Zheng, Quan and Vakharia, Asoo, Wholesale Price Discrimination and Contract Unobservability (March 27, 2024). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4774081

Shengming Zheng (Contact Author)

International Institute of Finance, School of Management, University of Science and Technology of China ( email )

Hefei, Anhui
China

Quan Zheng

University of Science and Technology of China - School of Management ( email )

Hefei, Anhui
China

Asoo Vakharia

University of Florida - Warrington College of Business Administration

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