Abuse of channel incentives by a manufacturer's authorized retailers often encourages gray markets to emerge, which affects supply chain profit as well as the manufacturer's brand image. Therefore, myopically selecting a product distribution contract can be harmful. We analyze the performance of a number of contracts in the presence of a gray market—primarily wholesale price, revenue sharing, and quantity discounts—and analyze their impact on prices charged, quantity ordered, as well as profits. We also investigate their impact on consumer surplus and social welfare. Our results indicate that selection of an appropriate contract is quite crucial, as different contracts give different results across a variety of operating parameters. Their performance is governed by the relative trade‐offs involving diversion of excess quantity to the gray market at the end of the season, an extension of target market due to lower prices in the alternate channel, and the negative impact on the manufacturer's brand that also affects its revenue. We delineate these characteristics and find that, in general, the quantity discount contract performs the worst. Interestingly, if the blowback suffered by the manufacturer on account of product availability in the gray market is high, the wholesale price contract may outperform the other contracts, including the revenue‐sharing contract with a truthful retailer, which otherwise is a more attractive option. We discuss the implications of our analysis, and also provide strategies and pointers to manage the impact of gray markets.
The uncertainty associated with the location, severity and timing of disaster makes it difficult for the humanitarian organization (HO) to predict demand for the aid material and thereby making the relief material procurement even more challenging. This research explores whether options contract can be used as a mechanism to aid the HO in making procurement of relief material less challenging by addressing two main issues: inventory risk for buyers and over-production risk for suppliers. Furthermore, a contracting mechanism is designed to achieve coordination between the HO and aid material suppliers in the humanitarian supply chain through optimal pricing. The options contract is modelled as a stylized version of the newsvendor problem that allows the HO to adjust their order quantity after placing the initial order at the beginning of the planning horizon. This flexibility helps to mitigate the risk of both overstocking and understocking for the HO as well as the risk of overproduction for the supplier. Our results indicate that the optimal values for decision parameters are not “point estimates” but a range of prices, which can facilitate negotiation between the two parties for appropriate selection of contract parameters under an options contract. The results imply that options contract can aid in the decentralized approach of fixing the prices between the HO and the supplier, which in turn would help in achieving systemic coordination.
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