Behavior-based pricing and wholesale contracting in competing supply chains with informative advertising

Abstract

The development of e-commerce has enhanced the ability of firms to identify existing and potential customers and set targeted prices accordingly, which is known as behavior-based pricing (BBP). This study investigates the effect of manufacturers’ informative advertising on the strategic interaction between wholesale price contracts (long-term or short-term) and downstream pricing mechanisms (BBP or not). We consider two horizontal differentiated supply chains in which firms not only compete in prices but also in informative advertising which is used to generate awareness of products. We find that the impact of BBP on channel members’ advertising, pricing and profits is the tradeoff of multiple effects. With BBP, manufacturers will advertise less and both retailers and manufacturers prefer short-term wholesale contracts. Moreover, BBP eases the price competition in the first period but intensifies it in the second period, especially for short-term wholesale contracts. In equilibrium, BBP is adopted by retailers only when the advertising cost is low, and manufacturers choose short-term wholesale contracts. Furthermore, BBP always hurts the consumer surplus and social welfare which means that targeted measures are needed to regulate firms’ price discrimination.