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Quality collaboration contracts under product pricing strategies

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Abstract

We study how the manufacturer and the supplier collaborate under various pricing and contracting scenarios. We characterize two downstream pricing strategies: (a) where the manufacturer announces the market price before the quality is determined, and (b) where the manufacturer decides the market price after the quality is determined. We also study three different contracting structures: (a) effort levels are both contractible and verifiable, (b) revenue sharing agreement between manufacturer and supplier, and (c) effort dependent contract when effort levels are verifiable but not contractible. We determine under which conditions the manufacturer should implement each of the scenarios.

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Notes

  1. Please note that if the manufacturer can observe, verify and subsequently enforce the required level of supplier’s efforts in the contract term, then it is termed as contractible effort. It is also possible that the efforts may be non-contractible because they are difficult to measure and verify to a third party (for example, a court). Even if the effort levels are observable and can be measured, both players have to “prove” their claims to the third party (Kaya and Özer 2009). Moreover, in some settings, the effort levels can be made verifiable to the third party by investing in a reporting/monitoring system (Bhattacharya et al. 2013; Demirezen et al. 2016).

  2. In \(<\phi ,w,L>\) contract, the upfront pricing scenario is always dominant to the postponed pricing. Hence, only the upfront pricing scenario is drawn in Fig. 3b.

  3. In \(<r,w,L>\) contract, the manufacturer’s profit is the same under both pricing scenarios.

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Authors and Affiliations

  1. Indian Institute of Management Calcutta, Kolkata, 700104, India

    Prasenjit Mandal

  2. Indian Institute of Management Bangalore, Bangalore, 560076, India

    Tarun Jain

  3. XLRI Xavier School of Management, Jamshedpur, 831001, India

    Abhishek Chakraborty

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  1. Prasenjit Mandal
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  2. Tarun Jain
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  3. Abhishek Chakraborty
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Correspondence to Prasenjit Mandal.

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Mandal, P., Jain, T. & Chakraborty, A. Quality collaboration contracts under product pricing strategies. Ann Oper Res 302, 231–264 (2021). https://doi.org/10.1007/s10479-021-04060-w

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