Retailer Dynamic Pricing and Ordering Decisions: Category Management versus Brand-by-Brand Approaches

This paper provides a framework for retailer pricing and ordering decisions in a dynamic category management setting. In this regard, the key ontributions of this paper are as follows. First, we develop a multi-brand ordering and pricing model that endogenizes retailer forward buying and aximizes profitability for the category. The model considers (i) manufacturer trade deals to retailers, (ii) ordering costs incurred by the retailer, iii) retailer forward buying behavior, and (iv) both ownand cross-price effects of all the brands in the category. Second, we use this model o compare differences in ordering and pricing decisions, and in profits, resulting from using a category management versus a brand-by-brand anagement approach. Our approach allows us to derive implications in a dynamic setting about the impact of interdependence among the brands pon decisions on pass-through of trade deals and retailer order quantity. We show that category management results in noticeably higher profits ersus brand-by-brand and cost-plus (markup) approaches. Further, our results suggest an interaction between a brand’s own-price effect and its ross-price effect emerges. If the cross-price effect for a brand is low – that is, the brand takes away relatively few sales from the other brands – the etail pass-through should increase with that brand’s own-price effect. On the other hand, when the cross-price effect is high, the retail pass-through ecreases with the brand’s own-price effect. 2010 New York University. Published by Elsevier Inc. All rights reserved.