Competing manufacturers in a retail supply chain: On contractual form and coordination

It is common for a retailer to sell products from competing manufacturers. How then should the firms manage their contract negotiations? The supply chain coordination literature focuses either on a single manufacturer selling to a single retailer or one manufacturer selling to many (possibly competing) retailers. We find that some key conclusions from those market structures do not apply in our setting, where multiple manufacturers sell through a single retailer. We allow the manufacturers to compete for the retailer's business using one of three types of contracts: a wholesale-price contract, a quantity-discount contract, or a two-part tariff. It is well known that the latter two, more sophisticated contracts enable the manufacturer to coordinate the supply chain, thereby maximizing the profits available to the firms. More importantly, they allow the manufacturer to extract rents from the retailer, in theory allowing the manufacturer to leave the retailer with only her reservation profit. However, we show that in our market structure these two sophisticated contracts force the manufacturers to compete more aggressively relative to when they only offer wholesale-price contracts, and this may leave them worse off and the retailer substantially better off. In other words, although in a serial supply chain a retailer may have just cause to fear quantity discounts and two-part tariffs, a retailer may actually prefer those contracts when offered by competing manufacturers. We conclude that the properties a contractual form exhibits in a one-manufacturer supply chain may not carry over to the realistic setting in which multiple manufacturers must compete to sell their goods through the same retailer. © 2010 INFORMS.

"Call for prices": Strategic implications of raising consumers' costs

Many consumer durable retailers often do not advertise their prices and instead ask consumers to call them for prices. It is easy to see that this practice increases the consumers' cost of learning the prices of products they are considering, yet firms commonly use such practices. Not advertising prices may reduce the firm's advertising costs, but the strategic effects of doing so are not clear. Our objective is to examine the strategic effects of this practice. In particular, how does making price discovery more difficult for consumers affect competing retailers' price, service decisions, and profits? We develop a model in which a manufacturer sells its product through a high-service retailer and a low-service retailer. Consumers can purchase the retail service at the high-end retailer and purchase the product at the competing low-end retailer. Therefore, the high-end retailer faces a free-riding problem. A retailer first chooses its optimal service levels. Then, it chooses its optimal price levels. Finally, a retailer decides whether to advertise its prices. The model results in four structures: (1) both retailers advertise prices, (2) only the low-service retailer advertises price, (3) only the high-service retailer advertises price, and (4) neither retailer advertises price. We find that when a retailer does not advertise its price and makes price discovery more difficult for consumers, the competition between the retailers is less intense. However, the retailer is forced to charge a lower price. In addition, if the competing retailer does advertise its prices, then the competing retailer enjoys higher profit margins. We identify conditions under which each of the above four structures is an equilibrium and show that a low-service retailer not advertising its price is a more likely outcome than a high-service retailer doing so. We then solve the manufacturer's problem and find that there are several instances when a retailer's advertising decisions are different from what the manufacturer would want. We describe the nature of this channel coordination problem and identify some solutions. © 2010 INFORMS.

Accessibility, availability and affordability of anti-malarials in a rural district in Kenya after implementation of a national subsidy scheme.

BACKGROUND: Poor access to prompt and effective treatment for malaria contributes to high mortality and severe morbidity. In Kenya, it is estimated that only 12% of children receive anti-malarials for their fever within 24 hours. The first point of care for many fevers is a local medicine retailer, such as a pharmacy or chemist. The role of the medicine retailer as an important distribution point for malaria medicines has been recognized and several different strategies have been used to improve the services that these retailers provide. Despite these efforts, many mothers still purchase ineffective drugs because they are less expensive than effective artemisinin combination therapy (ACT). One strategy that is being piloted in several countries is an international subsidy targeted at anti-malarials supplied through the retail sector. The goal of this strategy is to make ACT as affordable as ineffective alternatives. The programme, called the Affordable Medicines Facility - malaria was rolled out in Kenya in August 2010. METHODS: In December 2010, the affordability and accessibility of malaria medicines in a rural district in Kenya were evaluated using a complete census of all public and private facilities, chemists, pharmacists, and other malaria medicine retailers within the Webuye Demographic Surveillance Area. Availability, types, and prices of anti-malarials were assessed. There are 13 public or mission facilities and 97 medicine retailers (registered and unregistered). RESULTS: The average distance from a home to the nearest public health facility is 2 km, but the average distance to the nearest medicine retailer is half that. Quinine is the most frequently stocked anti-malarial (61% of retailers). More medicine retailers stocked sulphadoxine-pyramethamine (SP; 57%) than ACT (44%). Eleven percent of retailers stocked AMFm subsidized artemether-lumefantrine (AL). No retailers had chloroquine in stock and only five were selling artemisinin monotherapy. The mean price of any brand of AL, the recommended first-line drug in Kenya, was $2.7 USD. Brands purchased under the AMFm programme cost 40% less than non-AMFm brands. Artemisinin monotherapies cost on average more than twice as much as AMFm-brand AL. SP cost only $0.5, a fraction of the price of ACT. CONCLUSIONS: AMFm-subsidized anti-malarials are considerably less expensive than unsubsidized AL, but the price difference between effective and ineffective therapies is still large.