Vertical pricing competition in supply chains: The effect of production experience and coordination

Konstantin Kogan, Charles Tapiero

Research output: Contribution to journalArticlepeer-review

Abstract

We consider a two-echelon supply chain consisting of a single supplier (producer) and a retailer. The supplier determines the wholesale price with a production cost decreasing with experience. The retailer orders products from the supplier to meet demands. Negative effects of a vertical competition in static supply chain models are typically attributed to a double marginalization. Using an intertemporal supply chain problem, defined by a differential game, we show that in addition to the “cost” of double marginalization, the margin gained from reducing production costs affects the supply chain performance as well. In our analysis, performance is shown to deteriorate even more than the deterioration observed in static problems with no learning (experience). To improve the performance, we provide a time-variant version to the well-known, pure, two-part tariff strategy, which in its dynamic framework may coordinate the supply chain only partially. Efficient coordination in a supply chain is shown to be possible if a mixed two-part tariff strategy is employed, however.

Original languageEnglish (US)
Pages (from-to)461-479
Number of pages19
JournalInternational Transactions in Operational Research
Volume15
Issue number4
DOIs
StatePublished - Jul 2008

Keywords

  • Differential games
  • Pricing
  • Production control
  • Supply chains

ASJC Scopus subject areas

  • Business and International Management
  • Computer Science Applications
  • Strategy and Management
  • Management Science and Operations Research
  • Management of Technology and Innovation

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