Comparison of dynamic and static pricing strategies in a dual-channel supply chain with inventory control

Abstract

This paper studies the dynamic versus static pricing problem of a manufacturer–retailer dual-channel supply chain where demand is stochastic and price sensitive, and inventory can be replenished periodically. Four different pricing strategies, i.e., both members take dynamic pricing (DD strategy), retailer takes dynamic pricing while manufacturer takes static pricing (DS strategy), retailer takes static pricing while manufacturer takes dynamic pricing (SD strategy), and both members take static pricing (SS strategy), are considered. Under each of the pricing strategies, stochastic dynamic programming models are developed to determine the optimal pricing and inventory policy so that each member’s total expected discounted profit over the planning horizon is maximized. Numerical studies are carried out to compare the performance of different pricing strategies. Results show that: the optimal inventory policy under different pricing strategies is a base-stock type; under DD strategy, both members should reduce prices as long as one member’s initial inventory level is above its base stock level; under DS and SD strategies, the member adopting dynamic pricing should reduce price if its initial inventory level is above its base stock level; there exists a Nash pricing strategy which is affected by market parameters including demand variety, market size, channel preference, and price sensitivities.