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Market-Based Solutions to Vital Economic Issues
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Sep 1, 2013

Price-Quoting Strategies of an Upstream Supplier

Abstract

This paper studies an upstream supplier who quotes prices for a key component to multiple sellers that compete for an end-buyer’s indivisible contract. At most one of the supplier’s quotes may result in downstream contracting and hence produce revenue for her. We characterize the supplier’s optimal price-quoting strategies and show that she will use one of two possible types of strategies, with her choice depending on the sellers’ profit potentials relative to their uncertainties: secure, whereby she will always have business; or risky, whereby she may not have business. Addressing potential fairness concerns, we also study price-quoting strategies in which all sellers receive equal quotes. Finally, we show that the supplier’s optimal mechanism resembles auctioning a single quote among the sellers. This paper can assist upstream suppliers in their pricing decisions and provides general insights into multitier supply chains’ pricing dynamics.

 

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