The impacts of pricing schemes on decentralized assembly systems

Abstract

We study an assembly system where one assembler produces a final product to satisfy the price sensitive and uncertain demands. One unit of final product needs inputs from n complementary components each provided from a distinct supplier. The assembler orders from the suppliers and their relationships are governed by price-only contracts. The assembler practices two alternative pricing schemes: a fixed pricing scheme by which she fixes a retail price in all market situations, and a responsive pricing scheme by which she adjusts retail prices after observing actual demand curves. We find that, when the assembler practices the two pricing schemes, the suppliers charge the same wholesale prices, channel profit is allocated among the firms according to the same proportions, and the relative performances of the system under decentralized decision makings with respect to those under centralized decision makings are the same. Furthermore, responsive pricing improves the assembler’s absolute performance, and the gains pass over to the suppliers in terms of higher profits and to the customers in terms of enhanced product availability and lowered market price.