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IESE Business School IESE Research Papers

No D/721:
Improving supply chain efficiency through wholesale price renegotiation

Victor Martinez de Albeniz () and David Simchi-Levi

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.

Keywords: strategic customer; dynamic pricing; supply chain; (follow links to similar papers)

27 pages, November 21, 2007

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