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Integrating Production Costs in Channel Decisions

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  • Wu, Ruhai
  • Basuroy, Suman
  • Beldona, Srinath

Abstract

Production costs are critical in every business. In this research, we explore how variations in the manufacturer's production cost affect both the manufacturer–retailer channel relationship and the manufacturer's and the retailer's choice of a price-setting rule (e.g., a dollar-amount margin or a percentage-based margin). We employ a multidisciplinary approach that combines executive interviews, survey research, and a game-theoretic analytical model. The analytical model shows that both the manufacturer's and the retailer's price-setting rule influences the other party's approach to production cost. Therefore, the manufacturer's and the retailer's optimal choice of a price-setting rule is not invariant, as previous marketing literature has suggested; such choices depend on the shape of the production cost function. Overall, the results offer new insight into the channel outcomes in light of production costs. The empirical results support the analytical results.

Suggested Citation

  • Wu, Ruhai & Basuroy, Suman & Beldona, Srinath, 2011. "Integrating Production Costs in Channel Decisions," Journal of Retailing, Elsevier, vol. 87(1), pages 101-110.
    • Handle: RePEc:eee:jouret:v:87:y:2011:i:1:p:101-110
    DOI: 10.1016/j.jretai.2010.07.001
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    References listed on IDEAS

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    1. Kopalle, Praveen & Biswas, Dipayan & Chintagunta, Pradeep K. & Fan, Jia & Pauwels, Koen & Ratchford, Brian T. & Sills, James A., 2009. "Retailer Pricing and Competitive Effects," Journal of Retailing, Elsevier, vol. 85(1), pages 56-70.
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    Cited by:

    1. Kozlenkova, Irina V. & Hult, G. Tomas M. & Lund, Donald J. & Mena, Jeannette A. & Kekec, Pinar, 2015. "The Role of Marketing Channels in Supply Chain Management," Journal of Retailing, Elsevier, vol. 91(4), pages 586-609.
    2. Yao-Yu Wang & Jiasen Sun & Jian-Cai Wang, 2016. "Equilibrium markup pricing strategies for the dominant retailers under supply chain to chain competition," International Journal of Production Research, Taylor & Francis Journals, vol. 54(7), pages 2075-2092, April.

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