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Should a retailer bargain over a wholesale price with a manufacturer using a dual-channel supply chain?

Kenji Matsui

European Journal of Operational Research, 2022, vol. 300, issue 3, 1050-1066

Abstract: In this paper, we investigate the problem of whether a retailer should bargain over the wholesale price of a product with a manufacturer or accept the price unilaterally determined by the manufacturer. To investigate the problem, we develop a game-theoretic model describing a supply chain organized by one manufacturer and one retailer. Intuitively, if there is a bargaining opportunity, a retailer is better off bargaining over the wholesale price rather than simply accepting the price determined by the manufacturer. Consistent with this intuition, we first show the benchmark outcome that the retailer achieves a higher profit through bargaining over the price when the manufacturer uses only a single-channel supply chain, in which the manufacturer sells only through the retailer. Conversely, however, we demonstrate that this intuitive result can be completely reversed in a dual-channel supply chain environment, in which the manufacturer is able to sell products not only through the retailer but also directly to end-consumers. Specifically, we find that if a retailer's bargaining power is sufficiently strong and if consumers' substitutability between channels is substantially high, full acceptance of the wholesale price dictated by the manufacturer earns the retailer a higher profit than bargaining. This counterintuitive result is a warning to retailers in dual-channel environments because if a retailer does not accept the wholesale price dictated by a manufacturer, but heedlessly exploits its strong power and bargains with the manufacturer, it may ultimately harm itself and reduce its own profits.

Keywords: Supply chain management; Dual-channel supply chain; Nash bargaining; Wholesale price; Game theory (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.ejor.2021.09.012

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