Supplier and Buyer Driven Channels in a Two-Stage Supply Chain

July 11, 2014
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We explore the impact of power structure on price, sensitivity of market price, and profits in a two-stage supply chain with single product, supplier and buyer, and a price sensitive market. We develop and analyze the case where the supplier has dominant bargaining power and the case where the buyer has dominant bargaining power. We consider a pricing scheme for the buyer that involves both a multiplier and a markup. We show that it is optimal for the buyer to set the markup to zero and use only a multiplier. We also show that the market price and its sensitivity are higher when operational costs (namely distribution and inventory) exist. We observe that the  sensitivity of the market price increases non-linearly as the wholesale price increases, and derive a lower bound for it. Through experimental analysis, we show that marginal impact of increasing shipment cost and carrying charge (interest rate) on prices and profits are decreasing in both cases. Finally, we show that there exist problem instances where the buyer may prefer supplier-driven case to markup-only buyer-driven and similarly problem instances where the supplier may prefer markup-only buyer-driven case to supplier-driven.

Ertek, G., and Griffin, P. (2002). “Supplier and buyer driven channels in a two-stage supply chain.” IIE Transactions, 34, 691-700.
Note: This is the final draft version of this paper. Please cite this paper (or this final draft) as above.
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