Implications of Price Matching in Supply Chain Negotiation

Weixin SHANG, Gangshu (George) CAI

Research output: Journal PublicationsJournal Article (refereed)peer-review

Abstract

Problem definition: Few papers have explored the impact of price matching negotiation (PM), in which a channel matches its price with the resulting wholesale price bargained by another channel, on firms’ performances, consumer welfare, and social welfare, with and without supply chain coordination.

Academic/practical relevance: Negotiation has been widely seen in determining both uniform and discriminatory wholesale prices, which affect outcomes of competitive supply chain practices.

Methodology: To characterize the PM mechanism, we use game theory and Nash bargaining theory to compare PM with simultaneous negotiation (SN) through a common-seller two-buyer differentiated Bertrand competition model.

Results: Our analysis reveals that PM can benefit the seller but hurt all buyers, which is at odds with some fair wholesale pricing clauses intending to protect buyers. Under coordination with side payments, however, all firms can conditionally benefit more from PM than from SN. Despite firms’ gains, PM leads to less consumer utility and social welfare compared with SN, unless the second buyer in PM is considerably less powerful than the first buyer. Coordination further worsens PM’s negative impact on consumer utility and social welfare. Moreover, the existence of a spot market can increase the wholesale price in PM, hurting buyers, consumers, and society. Furthermore, the qualitative results about PM remain robust under an alternative disagreement point for PM, multiple buyers, and other extensions.

Managerial implications: This paper delivers insights on when price matching in supply chain wholesale price negotiation can benefit a seller, buyers, consumers, and society in a variety of scenarios. It advocates how managers can use PM to their own advantages and provides rationale to decision makers for policy regulations regarding wholesale pricing.
Original languageEnglish
Number of pages18
JournalManufacturing & Service Operations Management
DOIs
Publication statusE-pub ahead of print - 29 Oct 2021

Bibliographical note

W. Shang was supported by the Hong Kong Research Grants Council [GRF Project LU
13501617]. G. Cai acknowledges support from the National Natural Science Foundation of China [Grant 71629001] and Santa Clara University research scholarship programs.

The authors thank Editor-in-Chief Christopher Tang, the associate editor, and three anonymous referees for valuable comments and suggestions, which have significantly helped improve the quality of this paper, and Annabelle Feng, Yuri G. Levin, Lauren Lu, Miguel Villas-Boas, and conference attendees for useful input.

Keywords

  • pricing matching negotiation
  • simultaneous negotiation
  • Nash bargaining
  • channel competition
  • channel coordination

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