Retail price markup commitment in decentralized supply chains

We investigate the operational decisions and resulting profits for a supply chain facing price-dependent demand under a policy where there is an ex-ante commitment made on the retail price markup. We obtain closed-form solutions for this policy under the assumption of a multiplicative demand function and we analytically compare its performance with that of a traditional price-only policy. We compare these results to results obtained when demand follows a linear additive form. These formulations are shown to be qualitatively different as the manufacturer’s wholesale pricing decision is independent of the retail price markup commitment in the multiplicative case, but not when demand is linear additive. We demonstrate that the ex-ante commitment can lead to Pareto-improving solutions under linear additive demand, but not under the multiplicative demand function. We also consider the effect of pricing power in the supply chain by varying who determines the retail price markup.