Simplicity is beauty: pricing coordination in two-product supply chains with simplest contracts under voluntary compliance

Bin Shen, Xiaoyan Xu, Tsan Ming Choi

Research output: Journal article publicationJournal articleAcademic researchpeer-review

21 Citations (Scopus)

Abstract

Pricing is an important topic in supply chains. In this paper, we explore the coordination challenge with the use of simplest contracts for the case with two products. To be specific, we consider a single-manufacturer single-retailer make-to-order supply chain. In the base model, we consider the case when the product demands are independent and derive the optimal pricing decisions under a decentralised setting. Comparing with the centralised setting, we show that double marginalisation in the decentralised setting reduces the supply chain efficiency by 25%. We then find that the simpler contracts such as the three-parameter two-part tariff (3P-TT) contract and the three-parameter revenue sharing (3P-RS) contract can coordinate the two-product supply chain. We extend the analysis in two cases: (i) the case when the products are substitutable and (ii) the case when the retailer is risk averse, and show that both the 3P-TT and 3P-RS contracts can coordinate the respective supply chain. We also find that the degrees of product substitution and retailer’s risk averse significantly influence the supply chain performance.

Original languageEnglish
Pages (from-to)2769-2787
Number of pages19
JournalInternational Journal of Production Research
Volume57
Issue number9
DOIs
Publication statusPublished - 3 May 2019

Keywords

  • contracts
  • pricing
  • revenue sharing contract
  • supply chain coordination
  • two-part tariff
  • voluntary compliance

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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