Pricing, Quality, and Stocking Decisions in a Manufacturer-Centric Dual-Channel
32 Pages Posted: 29 Oct 2019 Last revised: 29 Sep 2021
Date Written: April 28, 2021
Problem Description. We consider a dual-channel in which a focal manufacturer (he) sells his output through his online store and an independent brick-and-mortar retailer (she). In this manufacturer-centric dual-channel, we study product line, stocking, and pricing decisions in the presence of stochastic demand and inventory constraints. The pricing decisions include choosing whether or not to give price match guarantees (PMGs), standard in the U.S. retail practice.
Methodology/Results. We analyze a game-theoretic model in which a focal manufacturer designs a product line, sets wholesale prices, and decides what products to sell in the dual-channel. An independent brick-and-mortar retailer responds to the product line design and the wholesale prices by making stocking decisions in her store. Then, both stores observe demand and independently set retail prices subject to any PMGs that the stores gave to consumers. The brick-and-mortar store (online store) fulfills demand in a make-to-stock (make-to-order) fashion. Whenever one of the stores is competitive, the manufacturer sells the same product line in both stores. Moreover, if the brick-and-mortar store has an advantage over the online store, it matches its price to obtain favorable wholesale pricing. We find no equilibria where the online store price matches the brick-and-mortar store or the stores price match each other. Finally, when neither store has a clear advantage, the manufacturer mitigates price competition by designing a different product for each store.
Managerial Implications. Our model helps identify optimal stocking and pricing strategies that depend on e-fulfillment cost and demand uncertainty and offers a novel reason for offering PMGs in a supply chain.
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