Behaviour-based pricing and wholesaling contracting under supply chain competition

Abstract

With the accessibility of customers’ purchase history and the development of data analytics, firms that have a better understanding of customer behaviours might charge different prices to their repeat and new customers. This mechanism is referred to as behaviour-based pricing (BBP). We model the competition of two vertically differentiated supply chains to study the strategic interaction between upstream contract choices (long-term or short-term) and downstream pricing mechanisms (BBP or not). We show that manufacturers always prefer long-term wholesale contracts. The adoption of BBP will decrease the profits of both manufacturers and the reseller that sells a low-quality product. However, the reseller that sells a high-quality product can benefit from BBP under certain conditions. Interestingly, when the resellers have the power to determine the type of wholesale contracts, a hybrid configuration where one supply chain uses a long-term contract and the other uses a short-term contract, could occur in equilibrium. Moreover, we find that the customers have a higher surplus under BBP, whereas the short-term wholesale contract can further increase the surplus.