Double Marginalization
This article covers meaning, importance, steps & example of Double Marginalization from operations perspective.
What is Double Marginalization?
Double Marginalization is a supply chain issue which happens when different stakeholders in the same industry but at different vertical levels in the supply chain or a customer journey apply their own markups or margins in prices. This phenomenon of adding margins more than once leads to the name double marginalization. Here different players including the manufacturer and other players vertically above apply their own set of margins leading to higher final price of the product.
Importance of knowing Double Marginalization issue
Double marginalization can lead to overall industry bearing losses as the final product would be become costlier than it is supposed to be. This mostly occurs when there are multiple players in a single market who control market with their influences and power.
All the players want premium and more profit from the value added to the product. From customer's standpoint, it drives the price way up than expected.
It is very important to know and understand the double marginalization in a particular supply chain as then only it can be resolved making products affordable. Once it is identified, there can be ways to resolve it.
3 Ways to resolve Double Marginalization
There are multiple ways through which this issue can be resolved:
1. Vertical Integration
Vertical integration in the supply chain where in one player handles the different steps in the supply chain. This is a good way to resolve double marginalization but it can lead to one player controlling everything in the market.
It can also be done through one player acquiring the other to control the market.
2. Transparency
There can be transparency in the market so that all stakeholders including consumer is aware about the issue and how the price was calculated. This can help bringing down the issue to a certain extent helping the market.
3. Strategic Alliances and Partnerships
Different players with market powers can work out a way to work towards resolving the double marginalization problem. They can agree to make sure that the final price is not too premium and customer can still afford the product which would be good for entire market.
Double Marginalization Example
Let us assume a market where a soft drink is made. The manufacturer standardizes the processes, makes the recipe and control the quality for the final product but it depends on bottle manufacturers for scale. Also there are distributors who make sure that the final product reaches everywhere as it is a mass product. Assuming that manufacturer has influence on the market and applies premium on it once. Now it can also happen that the distributors also control the market pretty well and they also apply additional margins on top of inventory before taking it to retail. Now there are margins added to product twice on top of regular expected profit. This would drive the price of the product higher making it expensive.
Hence, this concludes the definition of Double Marginalization along with its overview.
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