A game theoretic approach to coordinate price promotion and advertising policies with reference price effects in a two-echelon supply chain

Abstract

In this paper, the price promotion and manufacturer national advertising are investigated in a manufacturer-retailer supply chain with reference price effects of consumers taken into account. A centralized game is studied followed by the two Stackelberg games of “consumer price promotion” and “retailer-consumer price promotion”. In the Stackelberg games, the manufacturer plays the role of the leader and the retailer is the follower. The results obtained indicate that the reference price and the memory factor of the costumer have profound effects on the profits of supply chain members, optimal depth of price promotion and advertising level. If sensitivity of the consumer to the gap between the price and the reference price is large enough, reference price has a considerable effect on the consumer's tendency to buy and the price promotion increases channel profits. Also, it is observed that the memory of the costumer has a positive effect on profits of supply chain members. Moreover, it is also shown that there exists an indifference point for the memory factor at which the reference price impact factor has no effect on the optimal values of the decision variables. Finally, it is observed that channel efficiency is improved by advertising.