Pass-through decision analysis in a supply chain

Firms have seen rising costs on one side of the supply chain, and frugal shoppers on the other end in today’s business environment. It is possible that increment of rising costs will be passed on to consumers. How will these organizations that are seeking trade promotion decide on passthrough rate in a supply chain? We build a model to analyze both the own-brand and cross-brand cost pass-through incentives of a supply chain selling two products. The key contributions of this paper are as follows. First, we formulate a general pass-through problem as a comparative static of the price equilibrium in a channel duopoly. Our model considers (1) competition intensity, (2) consumer marginal willingness to pay (MWTP), (3) consumer perceivable difference as a threshold level to compare utility from consuming different products, and (4) product quality difference. We show that whether retail cross-brand passthrough is positive, zero or negative depends on whether the hazard rate of consumer MWTP is increasing, affine or decreasing; whether the supplier own-brand and cross-brand pass-through is strictly increasing, affine or decreasing depends on whether the reciprocal of the consumer MWTP hazard rate is strictly increasing, affine or decreasing. Second, we use this model to compare differences in pricing decisions and in profits, resulting from using a centralized versus a decentralized chain in both monopoly and duopoly markets. Our approach allows us to derive pricing implications in both monopoly and duopoly settings.