The Effect of List Price on Channel Performance with Consignment

Motivated by the newest contract offered by Amazon.com, called the Advantage Program, we study a supply chain where a retailer offers a vendor-managed inventory with consignment contract to n suppliers for selling their products. A key parameter in the contract is the product list price that the retailer allows each supplier to choose for its own product. The retailer then sets the retail price of each product at or below its list price for selling it to the market and remits its supplier an amount equal to a prespecified percentage of its list price on each unit sold. Two alternative consignment contracts are also considered with only one deviation where the retailer chooses the retail price of each product freely, or the retailer sets the retail price of each product at or above its list price. We show that the supplier’s list price plays a major role in determining firms’ decisions and performance in equilibrium. In particular, we find that by committing the retail price of each product to not exceeding the list price set by its supplier, the retailer can improve its own performance and the channel performance without hurting each supplier.