Target pricing: Demand-side versus supply-side approaches

Research output: Contribution to journalArticle

12 Scopus citations

Abstract

The practice of target pricing has been a key factor in the success of Japanese manufacturers. In the more commonly known demand-side approach, the target price for the supplier equals the manufacturers market price less a percent margin for the manufacturer but no cost-improvement expenses are shared. In the supply-side approach, cost-improvement expenses are shared and the target price equals the suppliers cost plus a percent margin for the supplier. Using a general oligopoly and Cournot duopoly models, we characterize the equilibrium and optimal policy for each approach under various conditions. We find that sharing cost-reduction expenses allows the manufacturer using the supply-side approach to attain competitive advantage in the form of increased market share and higher profit, particularly in industrial conditions where margins are thin and price sensitivities are high.

Original languageEnglish (US)
Pages (from-to)172-184
Number of pages13
JournalInternational Journal of Production Economics
Volume136
Issue number1
DOIs
StatePublished - Mar 1 2012

Keywords

  • Competing supply chains
  • Cost-improvement sharing
  • Cournot duopoly
  • Target pricing

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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