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OM 320 Harvast University Quantity Purchased Decrease Price Effect Discussion

OM 320 Harvast University Quantity Purchased Decrease Price Effect Discussion

Question Description

Problem #5

Responding to competition from the Private, Sheen invested in an advertising campaign aimed at increasing customer loyalty to the Express. As a result of the ad campaign, few customers were willing to switch to the Private when Armentrout stocked out of the Express, choosing instead to not purchase either the Express or the Private. As a result, demand for the Private was low, and Armentrout eventually decided to stop publishing it. Thus, the situation in Hamptonshire reverted to the scenario described in problem #3 above (i.e., Sheen sold the Express to Armentrout at a wholesale price of $0.80 per copy; Amentrout did not carry a competing private-label newspaper).

Sheen, however, noted that Armentrout’s fill rate was low even though he was no longer carrying the Private; she noted (from spreadsheet Express #3c) that he stocked approximately 491 newspapers, even though expected daily demand for the Express was around 575 units. The fill rate on the Express was close to 85%.

When Sheen spoke to Armentrout about stocking more copies of the Express, he pointed out that he was stocking what was optimal for his newsstand. “I even used the newsvendor formula,” he pointed out defensively, adding: “I will offer you a solution. Why don’t you buy back unsold copies of the Express at a salvage price close to the price at which you sell me the newspapers. You could even sell me all the newspapers on consignment [i.e., buy back unsold units at the wholesale price]—that’s what the major publishers do with their retailers. I will surely buy more if you will buy back unsold newspapers.”

Sheen returned to her office to construct the spreadsheet (“Hamptonshire Express: Problem #5”). The spreadsheet calculates Ralph’s stocking quantity to maximize his profits (as a function of the wholesale and buy-back prices) and also calculates Sheen’s effort h to maximize her profits (as a function of wholesale price). To understand the impact of subsidizing unsold inventory on her effort and Armentrout’s inventory stocking levels, Sheen varied the buy-back price at which she would buy back unsold newspapers.

Answer the following question

You should use the Excel spreadsheet “Hamtonshire Express: Problem #5 and “Hamptonshire express: Problem #5b” and attach the picture from excel to answer the question

a. Assume Sheen charges a wholesale price of $0.80 per copy of the Express. How does her buyback price affect Armentrout’s stocking quantity? What buy-back price would maximize channel profits? How much does Armentrout stock under this buy-back plan?

b. Identify the combination of wholesale price and buy-back price that maximizes expected daily profit for the channel. How does this number compare with expected daily profit for the channel in Problem #2 (i.e., the vertically integrated channel)? (Use the simulation in “Hamptonshire Express: Problem #5b”; the spreadsheet determines the optimal buy-back price given the value of the wholesale transfer price from Anna to Ralph.)

c. How would Armentrout’s stocking decision and Sheen’s effort decision change if Sheen insisted that Armentrout pay a daily franchise fee (a fixed daily fee that allowed him to carry the Express at his newsstand) in addition to the margins she earned?


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