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Do Style-Goods Retailers’ Demands for Guaranteed Profit Margins Unfairly Exploit Vendors?

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  • Murali Mantrala
  • Suman Basuroy
  • Shailendra Gajanan

Abstract

Retailers, particularly those in the style-goods and fashion apparel industry, are increasingly demanding guaranteed profit margins (GPMs) from their vendors. Under a GPM stipulation, a vendor has to offer a rebate to maintain the retailer’s target margin on the item if the retailer is compelled to take a markdown from the initial price to sell out the ordered quantity for the season. Vendors dispute retailers’ claim that a GPM is a “win-win” mechanism for both parties. They rather view it as a coercive device. The authors examine this issue in a multistage game with demand uncertainty. Interestingly, the analysis shows that depending on the level of demand uncertainty, it may be optimal for the vendor to lower rather than raise his wholesale price upon being asked for a GPM. Further, the analysis shows that under conditions of low demand uncertainty the provision of a GPM by the vendor to the retailer can indeed yield higher profits for both parties than in the NO GPM case. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Murali Mantrala & Suman Basuroy & Shailendra Gajanan, 2005. "Do Style-Goods Retailers’ Demands for Guaranteed Profit Margins Unfairly Exploit Vendors?," Marketing Letters, Springer, vol. 16(1), pages 53-66, January.
    • Handle: RePEc:kap:mktlet:v:16:y:2005:i:1:p:53-66
    DOI: 10.1007/s11002-005-0986-4
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    References listed on IDEAS

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    1. Mantrala, Murali K. & Raman, Kalyan, 1999. "Demand uncertainty and supplier's returns policies for a multi-store style-good retailer," European Journal of Operational Research, Elsevier, vol. 115(2), pages 270-284, June.
    2. Gary D. Eppen & Ananth. V. Iyer, 1997. "Backup Agreements in Fashion Buying---The Value of Upstream Flexibility," Management Science, INFORMS, vol. 43(11), pages 1469-1484, November.
    3. Ananth. V. Iyer & Mark E. Bergen, 1997. "Quick Response in Manufacturer-Retailer Channels," Management Science, INFORMS, vol. 43(4), pages 559-570, April.
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    Cited by:

    1. Lee, Chang Hwan & Rhee, Byong-Duk, 2008. "Optimal Guaranteed Profit Margins for Both Vendors and Retailers in the Fashion Apparel Industry," Journal of Retailing, Elsevier, vol. 84(3), pages 325-333.
    2. Gurnani, Haresh & Sharma, Arun & Grewal, Dhruv, 2010. "Optimal Returns Policy under Demand Uncertainty," Journal of Retailing, Elsevier, vol. 86(2), pages 137-147.
    3. MartI´n-Herrán, Guiomar & Sigué, Simon P., 2011. "Prices, promotions, and channel profitability: Was the conventional wisdom mistaken?," European Journal of Operational Research, Elsevier, vol. 211(2), pages 415-425, June.
    4. John Henke & Sengun Yeniyurt & Chun Zhang, 2009. "Supplier price concessions: A longitudinal empirical study," Marketing Letters, Springer, vol. 20(1), pages 61-74, March.
    5. Wu, Ruhai & Basuroy, Suman & Beldona, Srinath, 2011. "Integrating Production Costs in Channel Decisions," Journal of Retailing, Elsevier, vol. 87(1), pages 101-110.

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