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Pricing Policy in a Supply Chain: Negotiation or Posted Pricing Chia-Wei Kuo
 

Summary: Pricing Policy in a Supply Chain: Negotiation or Posted Pricing
Chia-Wei Kuo
Department of Business Administration, National Taiwan University, cwkuo@ntu.edu.tw
Hyun-Soo Ahn
Ross School of Business, University of Michigan Ann Arbor, hsahn@bus.umich.edu
Goker Aydin
Kelley School of Business, Indiana University, ayding@indiana.edu
Abstract
This paper examines the choice of pricing policy (posted pricing or negotiation) toward end
customers in a supply chain. Many retailers actively decide whether or not to encourage negoti-
ation on the shop-floor. Of course, the retailer's pricing policy influences not only the retailer's
profit, but also the profits of the manufacturers who sell through the retailer. However, little is
known on the forces that shape the pricing policy when two self-interested parties interact in a
supply chain. We consider two alternative models depending on who has the power to decide the
pricing policy: the manufacturer or the retailer. We find that an increase in the wholesale price
weakens the retailer's ability to price discriminate through negotiation. Therefore, the retailer
prefers negotiation at lower wholesale prices, and posted pricing at higher wholesale prices. We
also find that whenever the retailer prefers negotiation, the manufacturer does too. Therefore,
the retailer's discretion over the pricing policy causes friction only when the retailer wants to
use posted pricing, while the manufacturer wishes the retailer to use negotiation. We show that

  

Source: Aydin, Goker - Department of Operations and Decision Technologies, Indiana University Bloomington

 

Collections: Engineering