TITLE:
Strategic Commitment to Price in a Supply Chain with Downstream Innovation
AUTHORS:
Xiaoxiao Chang, Fengping Shen
KEYWORDS:
Supply Chain, Innovation, Commitment to Price, Cost Sharing, Risk Compensation
JOURNAL NAME:
Open Journal of Business and Management,
Vol.7 No.4,
September
19,
2019
ABSTRACT: We consider a supply chain with an upstream supplier and a downstream manufacturer who invests in innovation. We present an analytical framework for innovation decisions in a centralized, a flexible price and a commitment to price. These results show that the innovation by commitment to price is still insufficient and the supplier remains flexible price beyond a threshold amount of demand uncertainty. To solve this problem, we propose a combination mechanism, which consists of a commitment to price, a cost sharing and a compensation for the risk of demand uncertainty. We study the impact of combination mechanism with endogenous downstream innovation. Our research results show that the innovation by combination mechanism may be greater than or equal to the one by a centralized. More importantly than all of that, the combination mechanism can improve the performance of the supply chain and ensure that both supply chain members achieve a win-win situation.