Price Protection in the Personal Computer Industry

Abstract

P rice protection is a commonly used practice between manufacturers and retailers in the personal computer (PC) industry, motivated by drastic declines of product values during the product life cycle. It is a form of rebate given by the manufacturer to the retailer for units unsold at the retailer when the price drops during the product life cycle. It is a controversial policy in the PC industry because it is not clear how such a policy benefits the supply chain and its participants. We show that price protection is an instrument for channel coordination. For products with long manufacturing lead times, so the retailer has a single buying opportunity, a properly chosen price protection credit coordinates the channel. For products with shorter manufacturing lead times, so the retailer has two buying opportunities, price protection alone cannot guarantee channel coordination when wholesale prices are exogenous. However, when the price protection credit is set endogenously together with the wholesale prices, channel coordination is restored. In the two-buying-opportunity setting with fixed wholesale prices, we show that price protection has two primary impacts: (1) shifting sales forward in time and (2) increasing total sales. Finally, we present a simple numerical example that suggests, given the current economics of the PC industry, that price protection under fixed wholesale prices may benefit the total chain and the retailer but hurt the manufacturer.

Coordinating a Supply Chain with Customer Returns and Two-Period Newsboy Problem Using Insurance Contract

“…They showed that channel coordination is achieved by choosing the price protection credit properly in the single buying opportunity model. However, they don't discuss the issue win-win [23]. Lineh and Hong study channel coordination with revenue sharing contract for a two period newsboy problem between a single retailer and a single wholesaler.…”

“…The two-period newsboy problem setting discussed in this paper resembles the one describes in lee [23]. In this model, supply chain consists of a supplier and a single retailer, who supplier produces a product and sells it through a retailer ) R ( .…”

“…We use the parameter value in lee [23], which are as follows: It can be observed from Fig. 1, the expected profit of supplier increases with increase in side payment T. word, higher  means a higher risk and a higher possibility of losses for the retailer.…”

Commentary—Optimal Pricing and Return Policies for Perishable Commodities

“…Other extensions of the research have dealt with such issues as sharing of information, rebate policies, revenue sharing policies, e-commerce, price protection/rebates, and competition in the supply chain. Among the papers that cite this research are: Tsay (1990), Donohue (2000), and Cachon and Lariviere (2001)-dealing with information sharing; Taylor (2002) and Lee et al (2000)-dealing with rebate policies; Dana and Spier (2001), Pasternack (2002), and Cachon and Lariviere (2005)-dealing with revenue-sharing policies; Choi et al (2004)dealing with e-commerce; Lee et al (2000), Taylor (2001), and Taylor (2002)-dealing with price protection/rebates; Padmanabhan and Png (1997), Cachon and Zipkin (1999), and Mantrala and Raman (1999)dealing with competition in the supply chain.…”

Deterministic economic production quantity models with time-varying demand and cost

“…Moreover, in time-based competition today, the unit cost of a high-tech product declines significantly over its short product life cycle. For example, the cost of a personal computer drops constantly as shown in Lee et al [1]. Therefore, using the EPQ formulation in stages other than the maturity stage or for a product with short product life cycle will cause varying magnitudes of error.…”