Optimal ordering and pricing strategies in the presence of a B2B spot market

Wei XING, Shouyang WANG, Liming LIU

Research output: Journal PublicationsJournal Article (refereed)

28 Citations (Scopus)

Abstract

In the current paper, we examine the effect of a B2B spot market on the strategic behavior and the performance of a reseller who continues to use the traditional channel while participating in a B2B spot market. We analyze the case in which a risk-neutral reseller faces an additive or multiplicative demand function and identify sufficient conditions under which the optimal order quantity and retail price exist and are unique. We then analytically examine the case in which a risk-averse reseller participates in a fully liquid spot market. We also study numerically how varying liquidity, spot price volatility, demand variability, and correlation coefficient affect a firm's strategies and performance. We find that demand variability significantly affects both pricing and ordering strategies, whereas the spot price volatility has less influence on pricing decisions. Our results also show that for a risk-averse reseller to charge a lower retail price when the spot market liquidity increases is desirable. We further show that a B2B spot market cannot always improve a reseller's utility. These findings shed light on how resellers can adjust their procurement and pricing strategies to align with the new business environment created by the emergence of B2B spot markets, as well as have obvious implications for the development of a B2B spot market.
Original languageEnglish
Pages (from-to)87-98
Number of pages12
JournalEuropean Journal of Operational Research
Volume221
Issue number1
DOIs
Publication statusPublished - 16 Aug 2012

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Bibliographical note

This research was supported in part by The Hong Kong Polytechnic University under Grants G-U343 and G-U718, and the National Natural Science Foundation of China under Grants 70731003 and 70971076.

Keywords

  • B2B spot market
  • Market liquidity
  • Procurement and pricing strategy
  • Risk
  • Supply chain management

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