Evaluating Secondary Wholesale Price Distortion in Multi Tier Channels
Secondary wholesale price distortion is solved by eliminating unearned volume rebates and conditioning all back-end margins on verified point-of-sale data.
Pass through Elasticity
Meaning
Economic measures quantify the degree to which a change in wholesale input costs results in a corresponding adjustment to the final retail price. High levels of pass through elasticity indicate that a distributor or retailer transfers cost increases or savings almost entirely to the end consumer. This metric defines the sensitivity of the supply chain to commodity price shifts and tax changes.
The calculation stops applying when external price controls or fixed-price contracts prevent the movement of the retail sticker price regardless of wholesale fluctuations.
Retail Sensitivity
Margins are directly impacted by the ability of a business to adjust its prices without losing significant sales volume. When pass through elasticity is low, the retailer must absorb the cost increase themselves to maintain their market position. This situation often occurs in highly competitive sectors where consumers can easily switch to a lower-cost alternative.
Consumer Behavior
Demand levels fluctuate based on how much of the wholesale cost change is visible at the point of sale. If pass through elasticity is high, the consumer sees the full impact of global supply chain disruptions through higher prices. This transparency can lead to a reduction in total consumption if the price exceeds the perceived value of the product.
Cost Absorption
Internal efficiency often determines whether a firm can withstand a rise in procurement costs without raising its own rates. In cases of low pass through elasticity, the business must find savings in other areas like logistics or marketing to protect its profitability. This pressure drives innovation in the production process as companies seek to reduce their dependence on volatile raw materials.