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The effect of margin guarantees on pricing and production

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  • Timothy L. Urban

Abstract

The modelling of supply contracts has recently received a considerable amount of attention in the supply-chain literature. A 'guarantee of margins' is a form of supply contract that reflects the recent shift of power from manufacturers to retailers in several industries. These agreements ensure a certain profit margin for the retailer even if markdowns are required to move the product. Very little research, however, has been conducted on this specific type of supply contract. Thus, a single-period, two-echelon pricing/inventory model is developed to analyse profit margin guarantees. We show that a guarantee of margins can improve the expected channel profit, as long as the margin is not set at too high a level and that the customers may benefit as well, through higher output and lower prices.

Suggested Citation

  • Timothy L. Urban, 2007. "The effect of margin guarantees on pricing and production," International Journal of Manufacturing Technology and Management, Inderscience Enterprises Ltd, vol. 12(4), pages 314-326.
    • Handle: RePEc:ids:ijmtma:v:12:y:2007:i:4:p:314-326
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    Citations

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    Cited by:

    1. N Lehoux & S D'Amours & Y Frein & A Langevin & B Penz, 2011. "Collaboration for a two-echelon supply chain in the pulp and paper industry: the use of incentives to increase profit," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(4), pages 581-592, April.
    2. Hong Zheng & Lin Tian & Guo Li, 2023. "A bane or a boon? Profit‐margin‐guarantee contract in a channel with downstream competition," Production and Operations Management, Production and Operations Management Society, vol. 32(7), pages 2087-2100, July.

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