Uniform vs. retailer-specific pricing: How a supplier responds to the dominant retailers’ markup pricing strategy

Abstract

This paper investigates how dominant retailers should choose appropriate markup pricing strategies (a fixed-dollar markup, or a percentage markup), and how their supplier responds by choosing wholesale pricing strategies (a retailer-specific wholesale pricing, or a uniform wholesale pricing). Our results show that, all other things being equal, the uniform wholesale pricing strategy weakens the position of the retailers in the supply chain and thus is more favorable for the supplier. Specifically, when both retailers choose the same markup scheme, it is better for the supplier to choose the uniform wholesale pricing strategy since it can lead a higher profit for himself. The uniform wholesale pricing strategy also benefits the whole channel and the end-consumers, but hurts the dominant retailers. When the two retailers choose different markup schemes, the best choice for the supplier will still be the uniform wholesale pricing scheme if the level of downstream competition is sufficiently high; otherwise, the supplier would prefer the retailer-specific wholesale pricing scheme. The preference of the retailer using fixed-dollar markup pricing is just the opposite as compared to that of the supplier, while the retailer using percentage markup pricing always prefers retailer-specific wholesale pricing. Besides, the uniform wholesale pricing is beneficial to the whole channel. After anticipating the supplier’s reactions, both retailers are better off choosing percentage markup pricing no matter which wholesale pricing strategy the supplier chooses and what the level of competition is. Therefore, the final equilibrium would be the case where the dominant retailers choose the percentage-markup variant and the supplier always responds by adopting the uniform pricing scheme no matter what the level of bcompetition is. This equilibrium enhances the supply chain efficiency and benefits the end-consumers since it leads to the highest channel profits and the lowest retailing prices. Moreover, under this equilibrium, the supplier gets better while the retailers get worse as the level of competition increases.

Keywords:

• Dominant retailers
• competition
• markup pricing strategy
• wholesale pricing strategy

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 https://baijiahao.baidu.com/s?id=1651694163834097056&wfr=spider&for=pc.

2 Decision sequence is often taken as a proxy for the relative power of supply chain members. That is, the power (or dominance) is modeled through different timing rules with respect to the sequence of actions of various supply chain members, which is commonly used in the literature. Within this framework, the firm that makes its decision first is generally regarded to have more power over other firms in the supply chain. We follow this stream of literature and use the retailer-Stackelberg game to model the interactions between the retailers and the manufacturer. In this retailer-Stackelberg game, the retailer moves first to declare some terms to shape or influence other firms’ decision-marking. The guaranteed profit margin (which is similar to the markup policy in our paper) required by powerful retailers is often cited as the real-world example of retailer-Stackelberg game. Under this scheme, the powerful retailers first announce that the suppliers should guarantee them certain profit margins if the suppliers try to trade with these retailers. For example, Apple store states that 70% of the revenue that a service generates accrue to the content provider and 30% to Apple. These content providers make their pricing decisions according to the 30/70 policy declared by Apple. Therefore, we believe the retailer-Stackelberg assumption is appropriate reflection of reality.

Additional information

Funding

The research was supported in part by National Natural Science Foundation of China (Grant Nos. 72071137, 71671119 and 71871024), in part by Qinglan Project of Jiangsu Province, and in part by the Joint Development Program of Beijing Municipal Commission of Education.