Service level, pricing strategy and firm performance in a manufacturer-giant retailer supply chain

Purpose: The purpose of this paper is to provide a framework to help the manufacturer and the giant retailer to obtain optimal service level, pricing strategy, and market structure in order to maximize their respective profits. Design/methodology/approach: A profit-maximization model is developed to determine the optimal service level, pricing strategy, and market structure for supply chain players. Findings: Using a profit-maximization model, it is demonstrated that optimal service level and pricing strategy exist under different market structures in a manufacturer-giant retailer supply chain. In order to maximize their respective profits, the manufacturer and the giant retailer should cooperatively employ a coordinative market structure as an optimal market structure and a bargaining model can be utilized to implement profit sharing for the manufacturer and giant retailer to optimize their profits. Furthermore, it is also shown that the value of coordinative structure always increases with the customers' sensitivity of service, the number of customers preferring to purchase from giant retailer, and the decreasing price sensitivity. Research limitations/implications: The study assumes that all supply chain players have perfect market information. However, market information to the supply chain players could be incomplete and asymmetric. It is recommended that future research explores optimal service level and pricing strategy under incomplete and asymmetric information setting. Practical implications: The paper provides a very useful model framework to study optimum service level, pricing strategy, and market structure for business managers who are working in the manufacturer-giant retailer supply chain. Originality/value: The paper fills a conceptual and practical gap for a structured analysis of the current state of knowledge about service level, pricing strategy, and market structures in a manufacturer-giant retailer supply chain. The paper provides practical, solid advice and business examples that demonstrate the application of the optimal strategies for supply chain management.