By Dr. Narendra Singh, Assistant Professor at NUGSB
Think about buying a new phone or laptop: prices almost always drop a few months after launch.
This creates a dilemma for firms — if customers expect a price cut, many will simply wait, which hurts early sales. One well-known fix is for a firm to commit in advance to its future price, removing the incentive to wait. But most products don't reach customers directly from the manufacturer — they pass through a retailer, as with the phones sold through Best Buy or cars sold through dealerships.
My paper asks: Does committing to future prices still pay off once a manufacturer and a retailer are both making pricing decisions?
The findings challenge the standard advice.
Using a game-theoretic model of a manufacturer and retailer over two selling periods, I show that commitment only works as a joint decision — either both the manufacturer and the retailer commit to their future prices, or neither does. A situation where just one of them commits doesn't hold up as a stable outcome. More surprisingly, having the option to commit can backfire: under a wide range of conditions, both firms end up worse off than if neither had that option at all, a kind of prisoner's dilemma.
The paper also shows that when customers become more price-savvy and strategic about waiting, this can — counterintuitively — end up benefiting the retailer and the supply chain as a whole, rather than hurting them.
The broader takeaway for managers is that pricing strategy can't be decided in isolation.
A manufacturer's and retailer's commitment decisions are deeply interdependent, and lessons from studies of single firms selling directly to consumers don't automatically carry over to real-world supply chains with intermediaries.
The paper also looks at practical tools — like price protection policies (common at retailers such as Walmart, Target, and Best Buy) — and shows when these can serve as credible ways to make commitments stick.
Read the full article here, published in Journal of Manufacturing & Service Operations Management
Think about buying a new phone or laptop: prices almost always drop a few months after launch.
This creates a dilemma for firms — if customers expect a price cut, many will simply wait, which hurts early sales. One well-known fix is for a firm to commit in advance to its future price, removing the incentive to wait. But most products don't reach customers directly from the manufacturer — they pass through a retailer, as with the phones sold through Best Buy or cars sold through dealerships.
My paper asks: Does committing to future prices still pay off once a manufacturer and a retailer are both making pricing decisions?
The findings challenge the standard advice.
Using a game-theoretic model of a manufacturer and retailer over two selling periods, I show that commitment only works as a joint decision — either both the manufacturer and the retailer commit to their future prices, or neither does. A situation where just one of them commits doesn't hold up as a stable outcome. More surprisingly, having the option to commit can backfire: under a wide range of conditions, both firms end up worse off than if neither had that option at all, a kind of prisoner's dilemma.
The paper also shows that when customers become more price-savvy and strategic about waiting, this can — counterintuitively — end up benefiting the retailer and the supply chain as a whole, rather than hurting them.
The broader takeaway for managers is that pricing strategy can't be decided in isolation.
A manufacturer's and retailer's commitment decisions are deeply interdependent, and lessons from studies of single firms selling directly to consumers don't automatically carry over to real-world supply chains with intermediaries.
The paper also looks at practical tools — like price protection policies (common at retailers such as Walmart, Target, and Best Buy) — and shows when these can serve as credible ways to make commitments stick.
Read the full article here, published in Journal of Manufacturing & Service Operations Management