Pricing in Business-to-Business Contracts: Sharing Risk, Profit and Information

In this chapter, we illustrate how pricing terms in business-to-business (B2B) contracts can be used to align incentives, and to share risks, profits and information in supply chains that face uncertain demand. In the context of inventory risk, we discuss how a manufacturer can influence its retailer’s product availability and pricing decisions through B2B contracts. In the context of capacity risk, we illustrate how contracts enable a manufacturer to influence a supplier’s component capacity choice and to elicit strategic information from the supplier. In addition to developing relevant mathematical models, we also discuss contract implementation issues and managerial implications.