Business Intelligence

Supply Chains and Segment Profitability: How Input Pricing Creates a Latent Cross-Segment Subsidy

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Executive Summary

Recent years have seen an increasing emphasis on developing more precise accounting measures of market- and customer-level profitability. These efforts are aimed at helping prune unprofitable constituencies and targeting resources to more profitable segments. This paper demonstrates that even if perfected, such refined segment profitability measures may unwittingly neglect a latent cross-subsidization effect linked with firm participation in multiple markets. In particular, when a firm relies on a privately informed supplier for inputs used across markets, the wholesale price it pays depends on the average profitability of its markets.

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