Trade promotion mode choice and information sharing in fashion retail supply chains

Trade promotion has a significant impact on the retail business, particularly in the fashion sectors. Manufacturers have traditionally been concerned with the inefficiency of trade promotion due to the low pass-through rate of the trade deals from retailers to customers. The scan-back (SB) trade deal, which monitors a retailer's sales via an IT system, benefits the manufacturer, but may or may not benefit the retailer. We provide insight into when a retailer in a two-stage supply chain has incentive to accept the SB trade deal. We show that (1) the manufacturer and the entire supply chain can always benefit from the SB trade deal while the retailer benefits only under some conditions, and that (2) both the retailer and the manufacturer can benefit from the SB trade deal if the SB deal is accompanied by a buyback (BB) contract. We examine the effect of a retailer's confidential pass-through rate on both the retailer's and the manufacturer's incentives to use the SB trade deal.     

Buyer power and exclusion in vertically related markets

Suppliers and consumer organizations have become increasingly concerned by the build-up of buyer power of retailers in many markets. A major concern is that strong retailers will abuse their power to exclude products and rival retailers from the market to be able to increase prices to consumers. As a consequence, remedies to limit buyer power are discussed and implemented in many countries. In this paper we compare the incentives for exclusion, and the effect on consumers prices, under both buyer and seller power. We study a model with a dominant upstream manufacturer and a competitive fringe of producers offering their products to two differentiated downstream retailers. We compare the equilibrium outcome of this model when i) the dominant supplier holds all the bargaining power, and (ii) the retailers have all the bargaining power. We show that full or partial exclusion of either the competitive product or downstream retailers occurs when inter and intrabrand competition are strong. This is true both under seller and buyer power. However, in contrast to the received literature, we find that buyer power weakly enhances welfare compared to seller power because buyer power will lead to both more product variety (less exclusion) and lower retail prices.     

Price authority and information sharing with competing supply chains

We characterize the degree of price discretion that two competing manufacturers grant their retailers in a framework where demand is uncertain and privately observed by the retailers, while manufacturers only learn it probabilistically. In contrast with the consolidated vertical contracting literature, we assume that manufacturers cannot use monetary incentives to align the retailers’ incentives to pass on their unverifiable distribution costs to consumers. Our objective is to study how, in this context, an information-sharing agreement according to which manufacturers share their demand information affects prices, profits and consumer surplus. While equilibria with full price delegation never exist, regardless of whether manufacturers share information, partial delegation equilibria may exist with and without the exchange of information. These equilibria feature binding price caps (list prices) that prevent retailers from passing on their distribution costs to consumers, and are more likely to occur when manufacturers exchange demand information than when they do not share this information. Manufacturers profit from exchanging demand information when products are sufficiently differentiated, and retailers’ distribution costs are high enough. Yet, expected prices are unambiguously lower when manufacturers exchange demand information than when they don’t, making the information exchange beneficial to consumers.     

Strategic information sharing between competing retailers in a supply chain with endogenous wholesale price

This paper introduces a new motivation for information sharing in decentralized supply chains—as a mechanism to achieve truthful information sharing and to reduce signaling costs. We study a two-echelon supply chain with one manufacturer selling a homogenous product to n price-setting competing retailers. Each retailer has access to private information about the potential market demand, and the retailers have an ex-ante incentive to share this information with each other and to conceal the information from the manufacturer. However, without a mechanism that induces the retailers to truthful information exchange as their strategic choice, no information can be exchanged via pure communication (cheap talk). To overcome this obstacle, two signaling games are analyzed: in the first game, information is shared truthfully among the retailers; in the second game, information is also shared truthfully with the manufacturer. We show that under some conditions sharing information with the manufacturer results in a higher profit for the retailers.     

Inducing Cooperation with a Carrot Instead of a Stick

The Supreme Court’s reasoning in Leegin turned on the insight that manufacturers may use resale price maintenance (RPM) for procompetitive purposes. This paper presents a model of manufacturer-retailer interactions that clarifies why, as a rule, retailers and manufacturers are joint beneficiaries of service-inducing RPM. The model identifies factors that determine how RPM-generated benefits are allocated between a manufacturer and its retailers. The paper then shows that manufacturers may use market share discounts (MSD) in lieu of RPM or other vertical restraints to induce retailer performance. The outcomes and efficiency effects that are achieved with RPM can be replicated and usually surpassed if manufacturers substitute MSD for RPM, thereby enabling a manufacturer to retain all incremental profit rather than conceding some of it to retailers.     

分散决策下的双渠道供应链补偿策略——基于消费者渠道选择行为

为了有效解决由于对消费者的争夺从而引发的渠道之间关于定价、服务水平、利润等方面的冲突,基于消费者渠道选择行为,构建了网络直销市场与传统零售市场需求模型和双渠道供应链利润模型,运用Stackelberg模型,在制造商与零售商实施分决策时,通过制造商对零售商实施补偿激励前后的对比,分析了消费者渠道选择行为对网络直销渠道和传统零售渠道定价、制造商与零售商利润以及供应链总利润的影响,并求得最优定价及制造商的最优补偿额度和零售商的最优销售努力水平,进行了不同情况下的双渠道供应链利润的比较分析。结果表明,无论制造商是否实施补偿激励,都应随着网络消费者比例的增加而增加其网络直销价格;零售商的零售渠道价格应根据网络消费者比例的增加先降低到一定水平后再提升。当更多的消费者选择网络直销渠道时,制造商的补偿激励水平和零售商的销售努力程度均会下降。制造商应提高其补偿水平,进而激发零售商提高销售的努力水平,并使双方利润及供应链总利润最大化。研究结果为基于消费者选择行为的供应链补偿研究提供了新方法,对双渠道的供应链补偿研究有借鉴意义。     

Should leading brand manufacturers supply private label brands to retailers: Calibrating the trade-offs

The consolidation of retailers across markets has considerably altered the competitive dynamics between leading brand manufacturers and retailers. The era in which brand manufacturers dictate the game to compliant retailers is long gone. Nowadays, with more equal negotiation power retailers are no longer just channel partners but rather business partners with whom to build business-to-business relationships. This has become apparent especially since retailers have developed their own private label brands (PLB) and actively seek brand manufacturers to supply them. For brand manufacturers supplying PLB may bring potential benefits but may also harm profits. Thus, this research investigates conditions under which a leading brand manufacturer would be better or worse off in terms of profitability producing PLB for retailers. Using a game theoretic model, we calibrate the trade-offs between the shelf space devoted by the retailer to the manufacturer brand and the amount of profit required from supplying the PLB necessary to counteract cannibalization and to generate profits for the manufacturer, under different levels of uncertainty regarding the availability of alternative suppliers. Calibrating these trade-offs provides brand manufacturers clear guidelines for negotiations with retailers regarding shelf space allocation and wholesale prices to be profitable supplying PLB.     

Cartelization Through Buyer Groups

Retailers may enjoy stable cartel rents in their output market through the formation of a buyer group in their input market. A buyer group allows retailers to commit credibly to increased input prices, which serve to reduce combined final output to the monopoly level; increased input costs are then refunded from suppliers to retailers through slotting allowances or rebates. The stability of such an ‘implied cartel’ depends on the retailers’ incentives to source their inputs secretly from a supplier outside of the buyer group arrangement at lower input prices. Cheating is limited if retailers sign exclusive dealing or minimum purchase provisions. We discuss the relevancy of our findings for antitrust policy.     

Free Riding and Sales Strategies for the Internet

For many products, Internet sales can free ride off of the promotional effort exerted by brick and mortar retailers, leading manufacturers to attempt to control the availability and pricing of their products over the Internet. We examine three categories of products: fragrances, DVD players, and side-by-side refrigerators. Our evidence suggests that manufacturers that limit distribution in the physical world use various mechanisms to limit distribution online. In particular, these manufacturers generally prevent the sale of their products by Internet retailers that offer deep discounts. Furthermore, manufacturer websites tend to charge high prices, suggesting that manufacturers may internalize free rider issues.     

Universal service subsidies and cost overstatement: Evidence from the U.S. telecommunications sector

Utility subsidies are often defended as promoting universal service. However, specific support formulas may be poorly targeted and/or designed. The U.S. high-cost loop support (HCLS) program (formerly referred to as the Universal Service Fund (USF)), has been a key component of the FCC's USF program. With proposed initiatives for universal access to broadband, it is useful to critically evaluate how the HCLS creates a moral hazard problem. This study finds that companies receiving HCLS subsidies have an incentive to report high costs to the FCC in order to qualify for still higher support payments. Using data from 1136 rural telecom firms in 50 states (1992-2002), this study shows that some companies respond to current incentives by overstating costs (or incurring higher costs) as they approach the subsidy cutoff points. Compared to the no-subsidy group, companies at the point of greatest subsidy jump appear to overstate costs more due to larger marginal benefits. Such perverse incentives need to be recognized in future universal service initiatives.     

A theory of hub-and-spoke collusion

We develop a model of hub-and-spoke collusion between a manufacturer and two retailers. Demand is stochastic, and collusion between retailers is difficult; the best collusive equilibrium is inefficient (Rotemberg and Saloner (1986)). In the hub-and-spoke collusive agreement, retailers transmit their information about the state of demand to the supplier. The supplier uses this information to adjust the wholesale price. By organizing the collusion, the supplier increases profits of the vertical chain. We show that, surprisingly, this type of collusive agreement can under some conditions improve consumer welfare.     

Supply chain scheduling and coordination with dual delivery modes and inventory storage cost

We study a two-echelon supply chain scheduling problem in which a manufacturer acquires supplies from an upstream supplier and processes orders from the downstream retailers. The supply chain sells a single short-life product in a single season. We consider the scenario where the manufacturer can only accept some of the orders from the retailers due to its supplier's common production time window and its own two common production and delivery time windows. The upstream supplier processes materials and delivers the semi-finished products to the manufacturer within its time window. Then the manufacturer further processes these products to produce finished products and delivers them to the retailers within its two time windows, where one window is for production and normal delivery, and the other is for production and express delivery. Having to store the materials before processing them, the supplier incurs a storage cost, which depends on the order size and storage time. The manufacturer pays the transportation cost for delivering the finished products to the retailers. Due to double marginalization, the performance of the supply chain is sub-optimal. We model the supply chain problem as a flow shop scheduling problem with multiple common time windows. We derive some dominance properties and establish some theorems that help solve the sequencing problems for the orders and eliminate the idle time among the orders. Based on these results, we develop fast pseudo-polynomial dynamic algorithms to optimally solve the problem. We prove that the problem is NP-hard in the ordinary sense only. We develop two practically relevant and robust methods for the supply chain to achieve optimal profit-making performance through channel coordination.     

When do they care to share? How manufacturers make contracted service partners share knowledge

Manufacturing firms that outsource customer-facing services, risk losing touch with their customers and thereby forfeit valuable market and customer-related knowledge. To maintain informed and competitive, the manufacturer's customer-facing service partners should engage in knowledge sharing and transfer their market knowledge and insight to the firm. Building on knowledge transfer and organizational learning theory, this study investigates how contractual and non-contractual (i.e., relationship) characteristics influence knowledge sharing behavior by service partners. The authors specifically distinguish between sharing exploitative knowledge (insights that help the manufacturing firm to refine current skills and procedures) and exploratory knowledge (insights that help the manufacturing firm to challenge prior approaches to interfacing with the market). Based on survey data from 70 relationship managers from a large multinational firm and partial least squares path modeling, results show that contractual incentives had a negative effect on exploratory knowledge sharing, but not on exploitative knowledge sharing. The level of contract specification and relationship quality positively related to both types of knowledge sharing. Relationship manager experience related positively to exploratory knowledge sharing, but not to exploitative knowledge sharing. These findings provide valuable insights on how (non-)contractual mechanisms can be used to manage knowledge sharing in outsourced services.     

Net Neutrality,Network Capacity,and Innovation at the Edges

We study how net neutrality regulations affect a high‐bandwidth content provider (CP)'s investment incentives to enhance its quality of services in content delivery to end users. We find that the effects crucially depend on whether the CP's entry is constrained by the Internet service provider's network capacity. If the capacity is relatively large, the prioritization reduces the investment as CP's investment and prioritization form substitutes. With limited capacity, however, they become complements and the prioritization can facilitate the entry of congestion‐sensitive content. Our analysis suggests that the optimal policy may call for potentially asymmetric regulations across mobile and fixed networks.     

Royalties vs. upfront lump-sum fees in data communication environments

Mobile communications markets worldwide, today, are saturated, the number of mobile network operators (MNOs) in market is declining, mobile revenues are stagnant or falling, MNOs are becoming wireless Internet service providers, and economies of scope are strengthening. This paper challenges existing dominant views on spectrum assignment and license fee payments, estimates spectrum fees that MNOs would have paid under royalties and then compares them with upfront lump-sum fees actually paid by 3G licensees. This paper further proposes that governments need to consider assigning additional spectrum to incumbents as needs arise without using auctions and adopting royalties as a way of collecting spectrum fees should they collect them.     

Stock rationing under service level constraints in a vertically integrated distribution system

This paper addresses a rationing problem in a two-level, vertically integrated distribution system composed of one manufacturer and several retail points. The motivating case, developed in the vending machine sector and modeled as a newsvendor-like problem, is representative of many real settings where short-term changes in demand can be substantial while capacity modification is not a viable option. The paper provides an analytical discussion of the problem from two different standpoints: a pure profit-maximization perspective and a minimum service-level perspective, both subject to a product availability constraint that affects the service level the company can provide, and the related expected profit. By analyzing the Lagrangean formulation of the problem, we devise efficient computational procedures based on dichotomy search to find the optimal allotments to retailers, maximizing the expected profit and ensuring a minimum service level. Then, we extend the analysis to the evaluation of the highest service level that can be provided, under a product availability constraint. We identify conditions such that the proposed search procedures succeed in finding the optimal solutions, as well as bounds for the search domains. The proposed approach is legitimated under several demand distribution functions subject to a few commonly adopted restrictions that encompass many of the usually adopted continuous distributions. Finally, the paper presents a three-step decision-making framework using the proposed procedures, summarizing the decision paths the manufacturer might follow in order to optimize the allocation decision.     

Outsourcing horizontally differentiated tasks under asymmetric information

We explore how asymmetric information affects task assignment between a manufacturer and its supplier when tasks are horizontally differentiated, and when the comparative advantage in terms of marginal costs differs during the production process. We show that the manufacturer over-outsources to a generalist supplier and under-outsources to a specialist supplier depending on its level of efficiency. The presence of countervailing incentives drives these results. When the manufacturer’s internal costs are sufficiently low, it can externalize some of its best tasks and internalize its worst tasks. These two distortions simultaneously affect the contract offered to the generalist supplier.     

The mixed blessing of a deregulatory endpoint for the public switched telephone network

Receiving authority to dismantle the wireline public switched telephone network (PSTN) will deliver a mixture of financial benefits and costs to incumbent carriers and also jeopardize longstanding legislative and regulatory goals seeking ubiquitous, affordable and fully interconnected networks. Even if incumbent carriers continue to provide basic telephone services via wireless facilities, they will benefit from substantial relaxation of common carriage duties, no longer having to serve as the carrier of last resort and having the opportunity to decide whether and where to provide service. On the other hand, incumbent carriers may have underestimated the substantial financial and marketplace advantages they also will likely lose in the deregulatory process. Legislators and policy makers also may have underestimated the impact of no longer having the ability to impose common carrier mandates that require carriers to interconnect so that end users have complete access to network services regardless of location.This paper will identify the potential problems resulting from prospective decisions by National Regulatory Authorities (NRAs), such as the United States Federal Communications Commission (FCC), to grant authority for telecommunications service providers to discontinue PSTN services. The paper also will consider whether in the absence of common carrier duties, private carriers providing telephone services, including Voice over the Internet Protocol (VoIP), voluntarily will agree to interconnect their networks. The paper will examine three recent carrier interconnection issues with an eye toward assessing whether a largely unregulated marketplace will create incentives for carriers to interconnect networks so that consumers will have ubiquitous access to PSTN replacement and other broadband services.The paper concludes that private carrier interconnection models and information service regulatory oversight may not solve all disputes, or promote universal service public policy goals. Recent Internet interconnection and television program carriage disputes involving major players such as Comcast, Level 3, Fox, Cablevision and Google point to the possibility of increasingly contentious negotiations that could result in balkanized telecommunications networks with at least temporary blockages to desired content and services by some consumers.     

Price caps with capacity precommitment

We examine the effectiveness of price caps to regulate imperfectly competitive markets in which the demand is uncertain. To that effect, we study a monopoly that makes irreversible capacity investments ex-ante, and then chooses its output up to capacity upon observing the realization of demand. We show that the optimal price cap must trade off the incentives for capacity investment and capacity withholding, and is above the unit cost of capacity. Moreover, while a price cap provides incentives for capacity investment and mitigates market power, it cannot eliminate inefficiencies. Capacity payments provide a useful complementary instrument.     

Credence goods monopolists

With a credence good consumers never discover how much of the good they actually need. Therefore, the seller acts as the expert determining the customers’ requirements. This information asymmetry creates strong incentives for the seller to cheat on services. We analyze whether the market mechanism may induce non-fraudulent seller behavior. We consider four scenarios differing in the amount of information consumers have at hand to infer the seller’s incentives to be honest. In three constellations the profit maximizing credence goods monopolist provides honest services; only in one scenario there is no trade.