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Improving supply chain efficiency through wholesale price renegotiation

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Author Info

  • Martinez de Albeniz, Victor

    ()
    (IESE Business School)

  • Simchi-Levi, David

    (MIT)

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    Abstract

    In a decentralized supply chain, double marginalization is an important source of inefficiency. We suggest in this paper a simple mechanism to reduce it that uses a wholesale price contract and renegotiation. Our mechanism only requires repeated interaction, and rational behavior from the players. Specifically, over T rounds of negotiation, the supplier proposes different prices in each round, and the buyer places orders at the quoted price. Even though prices are decreasing in time, the buyer places a positive order, to force the supplier to reduce its price in the following round. This interaction results in higher profits for both supplier and buyer. We solve the buyer and supplier problems and show that, as T increases, supply chain efficiency tends to 100%, and the sub-optimality gap decreases with 1/T. Finally, we discuss how these results can be applied to design negotiation processes.

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    Bibliographic Info

    Paper provided by IESE Business School in its series IESE Research Papers with number D/721.

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    Length: 27 pages
    Date of creation: 21 Nov 2007
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0721

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    Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/
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    Related research

    Keywords: strategic customer; dynamic pricing; supply chain;

    This paper has been announced in the following NEP Reports:

    References

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    1. Wedad Elmaghraby & P{\i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.
    2. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
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    Cited by:
    1. Sun, Jiong & Debo, Laurens, 2014. "Sustaining long-term supply chain partnerships using price-only contracts," European Journal of Operational Research, Elsevier, vol. 233(3), pages 557-565.

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