Target pricing: Demand-side versus supply-side approaches

Research output: Contribution to journalArticle

8 Citations (Scopus)

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 2012

Fingerprint

Costs
Cost reduction
Profitability
Supply side
Pricing
Expenses
Margin
Suppliers
Target price
Factors
Optimal policy
Competitive advantage
Price sensitivity
Oligopoly
Profit
Market price
Cournot duopoly
Market share

Keywords

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

ASJC Scopus subject areas

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

Cite this

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