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While it has been widely recognized that a supplier's direct sales activities can have a significant impact on its interactions with a reseller, little attention has been paid to the fact that many suppliers can sell directly only by accessing consumers through an agency platform that collects commissions and fees. Because these agencies are often controlled by independent third parties or even the resellers themselves, we investigate how the control of the agency impacts the interactions between the supplier and a reseller. We find that when the agency is controlled by either a third-party or by the reseller, the effects of supplier encroachment are dramatically different than when the supplier can sell directly on its own. When the supplier can sell directly only by paying a commission to an independently operated agency platform, there is no longer a possibility that the total supply chain profit can be reduced when the supplier sells a positive quantity directly. For an intermediate range of direct selling cost, the supplier, the reseller, and society as a whole are better off when the supplier must rely upon an independently operated agency platform than when the supplier can sell directly without paying a commission. We also find that if the agency platform is controlled by the reseller to whom the supplier sells her product, this can discourage the supplier from developing direct sales capability unless the reseller either decentralizes his agency and reselling operations or is able to commit to the transaction fee in the agency channel.

Problem definition: Although it is well known that a reseller’s ability to hold strategic inventory under a short-term supply contract can potentially benefit both the reseller and a supplier, existing research on strategic inventory focuses almost exclusively on exclusive reselling environments. However, in practice, multiple suppliers often sell to the same nonexclusive reseller, and it is not uncommon for suppliers to ask for future commitments to order quantities from resellers in return for their own commitment to wholesale prices. We investigate how the possibility of strategic inventory influences competing suppliers’ choices between short-term transactional and long-term commitment contracts to a nonexclusive reseller. Methodology/results: Using a game-theoretic model, we consider the interactions between two partially substitutable suppliers and a single, nonexclusive reseller over a two-period horizon in which demand is deterministic. We demonstrate that in nonexclusive reselling environments, where more than one supplier sells its product through the same reseller, the use of strategic inventory under short-term contracts intensifies the price competition between suppliers. We show how this effect can be mitigated when one or both suppliers offer a long-term contract. Moreover, we show that long-term contracts can arise as an equilibrium outcome, particularly when products are more substitutable or holding costs are large. Managerial implications: By considering the interactions between two partially substitutable suppliers and a nonexclusive reseller in a multiperiod setting, we contribute to the literature on strategic contracting and long versus short-term contracts. Our research provides managers with a new explanation, beyond the need to encourage idiosyncratic investments or eliminate the possibility of hold-up, for why long-term contracts may benefit suppliers in practice, who face competition while selling through a nonexclusive reseller.

For many products, consumers need to physically experience them in order to assess their own valuations. We study how the equilibrium pricing among competing retailers depend upon assortments when consumers must search for this sort of fit information and are heterogeneous in their shopping behaviors. Specifically, we consider a market that consists of two retailers and two possible products. A consumer is either loyal to one of the retailers or is a shopper who follows a rational dynamic search process based on the prices and available assortments. We demonstrate how the retailers’ equilibrium pricing strategies depend upon their assortment choices and the resulting search process. Among other things, we show that, when the retailers carry non‐overlapping assortments, as search cost increases, the equilibrium pricing strategy changes from a low price with no discounting, to a high price with deep discounting. Furthermore, we find that when a full line retailer competes with a limited line retailer, a strategy of discounting only the common product can dominate one of discounting both products together. This is not the case when his rival also carries the full product line.

For many products, consumers may need to physically experience them in order to assess their own valuations. We consider how such uncertainty can affect the equilibrium pricing and assortment choices among competing retailers. Specifically, we consider a market that consists of two retailers with identical cost structures and two products with symmetric underlying demand. We characterize the pricing equilibria for each possible set of assortments based on how consumers optimally search for products in response to observed prices and assortments, and show how the structure of a retailer's inter-temporal pricing pattern (EDLP or HLP) should depend upon his own as well as his rival's assortment and the search costs. In addition, we provide conditions under which the retailers carry asymmetric assortment breadths in equilibrium.

This paper explores production and outsourcing decisions for two Original Equipment Manufacturers (OEMs) who produce partially substitutable products and have opportunities to invest in reducing the manufacturing cost. In such an environment, competition drives both OEMs to set lower prices and invest more than would maximize their combined profits, particularly when product substitutability is high. However, outsourcing provides a mechanism by which the two OEMs can credibly signal that they will not overinvest in cost reduction, mitigating a mutually destructive cost competition. Our paper explores the role that an external supplier(s) can play in dampening competition between the OEMs when there are opportunities to invest in cost reduction. In particular, we characterize the conditions under which a supplier can profitably enter the market by inducing the OEMs to outsource production. We first examine a basic model of two identical OEMs in which there is a single common supplier and a single component...

It has been recognized that when a durable goods manufacturer sells its output, it has an incentive to produce at a rate that will drive down the market price of the product over time. Because anticipation of declining prices makes consumers less willing to invest in owning the durable good, selling can be self-defeating for the manufacturer. If the manufacturer instead leases the product, it can eliminate its own incentive to decrease the price over time, which allows it to extract larger rents from consumers. In this paper, we investigate how a durable goods manufacturer’s choice between leasing and selling is affected by a complementary product that is produced by an independent firm. We show that a durable goods manufacturer that leases its product has an incentive to increase prices (by limiting the availability of the product) in response to the availability of a complement. Because this potential for opportunistic behavior discourages output of the complement, leasing can also be problematic. As a result, the durable goods manufacturer faces a trade-off between leasing, which commits the manufacturer to not overproduce, and selling, which commits it to not underproduce. Our contribution is to identify this trade-off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market.

It is generally in a firm’s interest for its supply chain partners to invest in innovations. To the extent that these innovations either reduce the partners’ variable costs or stimulate demand for the end product, they will tend to lead to higher levels of output for all of the firms in the chain. However, in response to the innovations of its partners, a firm may have an incentive to opportunistically increase its own prices. The possibility of such opportunistic behavior creates a hold-up problem that leads supply chain partners to underinvest in innovation. Clearly, this hold-up problem could be eliminated by a pre-commitment to price. However, by making an advance commitment to price, a firm sacrifices an important means of responding to demand uncertainty. In this paper we examine the trade-off that is faced when a firm’s channel partner has opportunities to invest in either cost reduction or quality improvement, i.e. demand enhancement. Should it commit to a price in order to encourage innovation, or should it remain flexible in order to respond to demand uncertainty. We discuss several simple wholesale pricing mechanisms with respect to this trade-off.

In this paper we study a situation in which a broker must manage the procurement of a short-life-cycle product. As the broker observes demand for the item, she learns about the demand process. However, as is often the case in practice, it becomes either more difficult or more expensive to procure the item as the selling season advances. Thus, the broker must trade off higher procurement costs against the benefit of making ordering decisions with better information about demand. Problems of this type arise, for example, in the travel industry, where a travel agent's cost of procuring airline and hotel reservations increases as the date of a vacation package approaches. We develop a newsvendor-like characterization of the optimal procurement policy. In a numerical analysis, we demonstrate how broker procurements tend to cluster just before price increases and how brokers can benefit from explicitly considering the effects of information about demand in their ordering policies.

This paper addresses the problem of jointly determining prices and production schedules for a set of items that are produced on the same production equipment. Under the assumptions that the production setup costs are negligible and that demand is seasonal but price dependent, we exploit the special structure of the problem to develop a solution procedure. Through a set of numerical examples, we demonstrate how a product's contribution to aggregate seasonality can increase its optimal price. Our examples also demonstrate that, among products that experience demand peaks during the firm's busy season, those that peak early in the busy season should be priced more aggressively than those that peak later.

This paper addresses the problem of jointly determining a single price and production schedule for a product with seasonal demand. Under the assumption that the ratio of the demands in any two periods does not depend upon the price at which the product is offered, we develop a procedure that guarantees an optimal solution. Perhaps more importantly, however, our model provides insight into the manner in which the firm's production cost increases with the intensity of total demand.

We explore the interactions between channel structure and mode of operations (leasing versus selling) and their implications for a manufacturer's willingness to invest in making her product more durable. Using a centralized manufacturer who leases her product as a point of reference, we find that an isolated change in either the channel structure (centralized to decentralized), or the operational mode (leasing to selling) can decrease the manufacturer's willingness to provide durability. However, if combined, these two changes together may strengthen the manufacturer's willingness to invest in durability. Consequently, a manufacturer who sells through an intermediary may invest more in durability than one who leases directly to end consumers. This result challenges the conventional wisdom in two different paradigms. First, from the perspective that durability is a dimension of quality, it challenges the conventional view that decentralization will decrease a manufacturer's incentive to provide a high quality product. Second, from the perspective of the externality that is created when a firm sells a durable product to strategic consumers who anticipate declining prices, it challenges the conventional view that a manufacturer who leases will provide more durability than one who sells.

We consider a setting in which consumers experience distinct instances of need for a durable product at random intervals. Each instance of need is associated with a random utility and the consumers are differentiated according to the frequency with which they experience such instances of need. We use our model of consumer utility to characterize the firm's optimal strategy of whether to sell, rent, or do a combination of both in terms of the transaction costs and consumers' usage characteristics. We find that the two modes of operation serve different roles in allowing the firm to price discriminate. While sales allow the firm to discriminate among consumers of different usage frequencies, rentals allow it to discriminate according to consumers' realized valuations. Consequently, even when transaction costs are negligible, it is often optimal for the firm to simultaneously rent and sell its product. In addition, we find that although sales and rentals are substitutes and that the offering of sales weakly increases rental prices, it is possible that the introduction of rentals to a pure selling operation can either increase or decrease the optimal sales prices.

Many durable products cannot be used without a contingent consumable product, e.g., printers require ink, iPods require songs, razors require blades, etc. For such products, manufacturers may be able to lock in consumers by making their products incompatible with consumables that are produced by other firms. We examine the effectiveness of such a strategy in the presence of strategic consumers who anticipate the future prices of both the durable product and the contingent consumable. Under a lock-in strategy, the manufacturer has pricing power over the contingent consumable, which she can use to extract additional rents from higher valuation consumers, but such pricing power may also reduce consumers' willingness to pay for the durable because it subjects them to being held up with higher consumables prices in the future. Restricting our attention to linear pricing policies, we find that if the manufacturer can commit to shutting down production of her durable after an initial one-time sale, then competition from another consumable of an appropriately degraded level of quality can benefit the manufacturer by mitigating consumers' fears of being held up. On the other hand, when the manufacturer cannot commit to shutting down production of her durable, then her own output of additional durables gives her an incentive to keep consumables prices low, and competition in the consumables market is less beneficial. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors.

Many durable products cannot be used without a contingent consumable product, e.g. printers require ink, iPods require songs, razors require blades, etc. For such products, manufacturers may be able to lock-in consumers by making their products incompatible with consumables that are produced by other firms. We examine the effectiveness of such a strategy in the presence of strategic consumers who anticipate the future prices of both the durable product and the contingent consumable. Under a lock-in strategy, the manufacturer has pricing power over the contingent consumable which she can use to extract additional rents from higher valuation consumers, but such pricing power may also reduce consumers' willingness to pay for the durable because it subjects them to being held-up with higher consumables prices in the future. Restricting our attention to linear pricing policies, we find that if the manufacturer can commit to shut down production of her durable after an initial one-time sale, then competition from another consumable of an appropriately degraded level of quality can benefit the manufacturer by mitigating consumers' fears of being held-up. On the other hand, when the manufacturer cannot commit to shutting down production of her durable, then her own output of additional durables gives her an incentive to keep consumables prices low, and competition in the consumables market is less beneficial.

In spite of the fact that many durable products are sold through dealers, the literature has largely ignored the issue of how product durability affects the interactions between a manufacturer and her dealers. We seek to fill this gap by considering a durable goods manufacturer that uses independent dealers to get her product to consumers. In contrast to much of the literature, we specifically consider the possibility that if the manufacturer sells her product, then the dealers can either sell or lease it to the final consumer. One of our more interesting findings is that, when the level of competition among dealers is high, the manufacturer prefers to lease the product to her dealers, which forces them to lease to consumers. This complements existing results that show that when suppliers of durable goods interact directly with consumers, selling is the dominant strategy for high levels of competitive intensity. In addition, our results help to explain differences in the selling / leasing policies that are observed in the office equipment and automobile industries.

It has been well documented that buyers can benefit significantly from being able to place reactive orders in response to observed demand for a short life cycle product. In practice, suppliers often fill these reactive orders with less than total reliability. Although reactive order fulfillment can allow the supply chain to capture more of the demand that is realized, it can also deter retailers from ordering as much initially. In this chapter, we investigate how this trade-off affects the retailers’ ordering behavior as well as the profits of the manufacturer, the retailers, and the supply chain as a whole. We also develop insight as to how a manufacturer should offer a reactive ordering policy.

In spite of the fact that many durable products are sold through dealers, the literature has largely ignored the issue of how product durability affects the interactions between a manufacturer and her dealer(s). We seek to fill this gap by considering a durable goods manufacturer that uses an independent dealer(s) to get her product to consumers. If the manufacturer sells her product to the dealer, then the dealer can either sell or lease it to the final consumer. On the other hand, if the manufacturer leases her product to the dealer, then the dealer is forced to lease it to the consumer. We first characterize the equilibrium for a manufacturer who distributes through a single dealer as a function of the costs of production and distribution. Among other things, we show that the selling and leasing decisions of the two channel partners should balance operational efficiency against the mitigation of time inconsistency. Subsequently, we characterize the equilibrium for a manufacturer who distributes through multiple dealers as a function of the intensity of inter-dealer competition. One of our more interesting findings is that, when the level of competition among dealers is high, the manufacturer prefers to lease the product to her dealers, which forces them to lease to consumers. This complements existing results that show that when suppliers of durable goods interact directly with consumers, then selling becomes the dominant strategy when competitive intensity is high.