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Price Protection in the Personal Computer Industry

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Author Info

  • Hau L. Lee

    ()
    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • V. Padmanabhan

    ()
    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Terry A. Taylor

    ()
    (Department of Industrial Engineering and Engineering Management, Stanford University, Stanford, California 94305)

  • Seungjin Whang

    ()
    (Graduate School of Business, Stanford University, Stanford, California 94305)

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    Abstract

    Price protection is a commonly used practice between manufacturers and retailers in the personal computer (PC) industry, motivated by drastic declines of product values during the product life cycle. It is a form of rebate given by the manufacturer to the retailer for units unsold at the retailer when the price drops during the product life cycle. It is a controversial policy in the PC industry because it is not clear how such a policy benefits the supply chain and its participants. We show that price protection is an instrument for channel coordination. For products with long manufacturing lead times, so the retailer has a single buying opportunity, a properly chosen price protection credit coordinates the channel. For products with shorter manufacturing lead times, so the retailer has two buying opportunities, price protection alone cannot guarantee channel coordination when wholesale prices are exogenous. However, when the price protection credit is set endogenously together with the wholesale prices, channel coordination is restored. In the two-buying-opportunity setting with fixed wholesale prices, we show that price protection has two primary impacts: (1) shifting sales forward in time and (2) increasing total sales. Finally, we present a simple numerical example that suggests, given the current economics of the PC industry, that price protection under fixed wholesale prices may benefit the total chain and the retailer but hurt the manufacturer.

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    File URL: http://dx.doi.org/10.1287/mnsc.46.4.467.12058
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 46 (2000)
    Issue (Month): 4 (April)
    Pages: 467-482

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    Handle: RePEc:inm:ormnsc:v:46:y:2000:i:4:p:467-482

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    Related research

    Keywords: channel coordination; supply chain management; computer industry; incentives; inventory management;

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    Cited by:
    1. Liu, Yong & Qin, Fei & Fry, Michael J. & Raturi, Amitabh S., 2012. "Multi-period modeling of two-way price commitment under price-dependent demand," European Journal of Operational Research, Elsevier, vol. 221(3), pages 546-556.
    2. Seifert, Ralf W. & Thonemann, Ulrich W. & Sieke, Marcel A., 2006. "Integrating direct and indirect sales channels under decentralized decision-making," International Journal of Production Economics, Elsevier, vol. 103(1), pages 209-229, September.
    3. Lee, Chang Hwan & Rhee, Byong-Duk, 2011. "Trade credit for supply chain coordination," European Journal of Operational Research, Elsevier, vol. 214(1), pages 136-146, October.
    4. Wu, Cheng-Han, 2012. "Price and service competition between new and remanufactured products in a two-echelon supply chain," International Journal of Production Economics, Elsevier, vol. 140(1), pages 496-507.
    5. Hwan Lee, Chang & Rhee, Byong-Duk, 2010. "Coordination contracts in the presence of positive inventory financing costs," International Journal of Production Economics, Elsevier, vol. 124(2), pages 331-339, April.
    6. Lee, Chang Hwan & Rhee, Byong-Duk & Cheng, T.C.E., 2013. "Quality uncertainty and quality-compensation contract for supply chain coordination," European Journal of Operational Research, Elsevier, vol. 228(3), pages 582-591.
    7. Lee, Chang Hwan & Rhee, Byong-Duk, 2007. "Channel coordination using product returns for a supply chain with stochastic salvage capacity," European Journal of Operational Research, Elsevier, vol. 177(1), pages 214-238, February.
    8. Wang, Charles X. & Benaroch, Michel, 2004. "Supply chain coordination in buyer centric B2B electronic markets," International Journal of Production Economics, Elsevier, vol. 92(2), pages 113-124, November.

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