The effect of margin guarantees on pricing and production

Timothy L. Urban

International Journal of Manufacturing Technology and Management, 2007, vol. 12, issue 4, 314-326

Abstract: The modelling of supply contracts has recently received a considerable amount of attention in the supply-chain literature. A 'guarantee of margins' is a form of supply contract that reflects the recent shift of power from manufacturers to retailers in several industries. These agreements ensure a certain profit margin for the retailer even if markdowns are required to move the product. Very little research, however, has been conducted on this specific type of supply contract. Thus, a single-period, two-echelon pricing/inventory model is developed to analyse profit margin guarantees. We show that a guarantee of margins can improve the expected channel profit, as long as the margin is not set at too high a level and that the customers may benefit as well, through higher output and lower prices.

Keywords: supply contracts; guaranteed profit margins; value chain management; supply chain management; SCM; two-echelon pricing-inventory model. (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (2)

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