Resale Price Maintenance with Strategic Customers

Bazhanov, Andrei and Levin, Yuri and Nediak, Mikhail (2017): Resale Price Maintenance with Strategic Customers.

Abstract

We consider a decentralized supply chain (DSC) under resale price maintenance (RPM)selling a limited-lifetime product to forward-looking customers with heterogeneous valuations. When customers do not know the inventory level, double marginalization in DSC leads to a higher profit and lower aggregate welfare than in centralized supply chain (CSC). When customers know the inventory, DSC coincides with CSC. Thus, overestimation of customer awareness may lead to overcentralization of supply chains with profit loss comparable with the loss from strategic customers. The case with unknown inventory is extended to an arbitrary number of retailers with inventory-independent and inventory-dependent demand. In both cases, the manufacturer, by setting a higher wholesale price, mitigates the inventory-increasing effect of competition and reaches the same profit as with a single retailer. The high viability of RPM as a strategic-behavior-mitigating tool may serve as another explanation of why manufacturers may prefer DSC with RPM to a vertically integrated firm.

• Item Type: MPRA Paper
• Language: English
• Keywords: limited-lifetime product, strategic customers, limited information, aggregate welfare, oligopoly
• Subjects: D - Microeconomics > D9 - Intertemporal Choice; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L4 - Antitrust Issues and Policies > L42 - Vertical Restraints ; Resale Price Maintenance ; Quantity Discounts

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