My Latest Publication in Management Science: Higher Prices for Larger Quantities?
We study a microprocessor company selling short-life-cycle products to a set of buyers that includes large consumer electronic goods manufacturers. The seller has a limited capacity for each product and negotiates with each buyer for the price. Our analysis of their sales data reveals that larger purchases do not always result in bigger discounts. Instead, the discount curve is like an "N". While existing theories cannot explain this non-monotonic pattern, we develop an analytical model and show that the non-monotonicity is rooted in how sellers value capacity when negotiating with a buyer. Large buyers accelerate the selling process and small buyers are helpful in consuming the residual capacity. However, satisfying mid-sized buyers may be costly because supplying these buyers can make it difficult to utilize the remaining capacity, which is often too much for small buyers but not enough for large buyers. We briefly discuss the implications for capacity rationing and posted pricing as well as potential applications to other industries.