The effect of margin guarantees on pricing and production
by Timothy L. Urban
International Journal of Manufacturing Technology and Management (IJMTM), Vol. 12, No. 4, 2007

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.

Online publication date: Fri, 25-May-2007

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