Double marginalization

Our results also capture the notion of double marginalization of the vertical supply chain where two independent firms, upstream and downstream, may end up with lower profits in the decentralized setting. The decentralized model also considers price ambiguity since the price information is not revealed between... 

Y. Durham, An Experimental Examination of Double Marginalization and Vertical Relationships, Journal of Economic Behavior Organization, 42, 207-229 (2000). 

This difference in supply chain profit arises because of double marginalization, i.e., the retailer does not see the supply chain margin associated with each sale realized or lost and thus makes inventory decisions that are lower than the supply chain optimal decisions (for service levels > 0.5). 

How does the problem change from the discussions in earlier sections where the manufacturer absorbs all risk Notice that all of the contracts we discussed earlier can now be considered for this case. As before, double marginalization will prevent the supply chain from being coordinated with a wholesale price only contract. A payback contract now becomes a returns contract, where the manufacturer takes back leftover product from the retailer with an associated payment for returns. The payback contract can coordinate the supply chain in this case. The capacity reservation contract also coordinates the supply chain in this case due to its equivalence to the returns contract, as discussed earlier. 

Grocery retailers have to carry store inventory to satisfy retail demand over the supplier lead time to ensure high in stock levels. Thus, retailers have to forecast demand at price levels offered. As discussed in the chapter on coordination, in an uncoordinated supply chain, double marginalization results in a lower retail service level than is optimal for the supply chain as a whole. 

The typical analytical approach is to study the source of inefficiency (often related to double marginalization), and various mechanisms for achieving channel coordination and/or Pareto improvement. Mechanisms so studied recently include resale price maintenance, full-line forcing, quantity discounts, manufacturer returns, quantity flexibility, sales rebates, revenue sharing, price protection, and markdown allowances. New studies continue to be produced at a prodigious rate by generalizing the basic framework, perhaps by adding retailer decision variables (e.g., some form of effort, in addition to retail price... 

In this model, system inefficiency results from two factors. One is double marginalization within the reseller channel. Another is the failure of each channel to fully perceive the positive externality that its sales efforts can have on the other channel. 

In the previous section, we demonstrated that the solutions of Models T and D are generally different from the system-optimal solution. In addition to the double marginalization effect, drop-shipping is also plagued by marketing-operations misalignment. Can we come up with a mechanism that will induce coordination As the next observation shows, a price-only contract is not sufficient. 

For a manufacturer that has forward integrated to provide direct product sales (models 3 and 4 of Figure 15.1), the opportunity exists to coordinate distribution and fulfillment. Research taking a traditional approach to channel coordination (which seeks to eliminate double marginalization) is thoroughly reviewed in Lariviere (1999) and Tsay, et al. (1999). In this chapter, we focus attention on research that assumes the existence of both a traditional channel and an internet channel, and exploits the differences between the two channels to manage the supply chain more effectively. 

The problem is modeled as a stationary multi-period newsvendor problem with lost sales. Assuming a coordinated policy (where double marginalization has been eliminated through centralized decision making). The decision to be optimized is the base stock level at the traditional retailers, 5rz,with i g 1,.. ., iV and at the internet store, Sj. Since each traditional retailer is... 

While Seifert, et al. (2001) show the benefits of supply chain cooperation, they note that in the examples they have explored, the benefits of coordinating a supply chain are greater than the benefits of cooperating, indicating that supply-chain coordination (to eliminate double marginalization) probably should precede supply-chain cooperation. In any case, supply-chain coordination is a compelling motivation for supply chain integration. 

This section uses a more narrow definition of channel coordination than the rest of the chapter. Here channel coordination refers to efforts to eliminate double marginalization. 

Most research on interactions among participants of an enterprise system has been in the context of decentralized versus shared information. When the information is decentralized, studies are primarily on constructing different mechanisms to enable coordination in a two-stage setting and to eliminate inefficiencies stemming from factors such as double marginalization (e.g. Cachon and Zipkin [19] and Jin and Wu [41]). Detailed discussion of these topics may be found in Chapters 2, 4 and 17. 

Sanders, N. (2008). Surplus effects of vertical integration with and without double marginalization - examples. Graduate Department of Economics, UC Davis, http //njsanders.people.wm.edu/ 121 B/Double Marginalization Handout.pdf... 

As discussed in Chapter 11, double marginalization reduces supply chain profits because the supply chain margin is divided between the two parties, and each stage makes its decisions considering only its own margin. We now discuss several other instances in which double marginalization leads to a loss in supply chain performance in the presence of demand uncertainty. 

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