Supplier- and buyer-driven channels in a two-stage supply chain

Abstract

In this paper we explore the impact of power structure on price, sensitivity of market price, and profits in a two-stage supply chain with a single-product, -supplier and -buyer. We develop and analyze the case where the supplier has dominant bargaining power and the case where the buyer has dominant bargaining power, and consider a pricing scheme for the buyer that involves both a multiplier and a constant mark up. We show that it is optimal for the buyer to set the mark-up to zero and use only a multiplier and that the market price and its sensitivity are higher when operational costs (namely distribution and inventory) exist. We also observe that the sensitivity of the market price increases nonlinearly 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.

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