Coordinating a dual-channel supply chain with pricing and extended warranty strategies under demand substitution effects

Abstract

With technology innovation and market complexity, this paper examines a dual-channel supply chain with one manufacturer and one retailer. A manufacturer performs the encroachment by selling products through offline retail and direct online channels. It also provides an extended warranty service with the product sold in both channels. This study identifies the best pricing and extended warranty strategies as decision variables to maximize profits for the dual-channel supply chain under the demand substitution effect. Despite the centralized scenario, a decision-making model in the decentralized scenario is also developed using Stackelberg’s game to determine optimal decision variables. The results demonstrate that the centralized scenario consistently outperforms the decentralized scenario. Thus, coordination contracts are proposed considering the profit structure, revenue-sharing and cost-sharing contracts to coordinate and promote a win-win situation for supply chain members. Furthermore, demand substitution effects are investigated for channel parameters represented in the initial market size, price sensitivity coefficient, and warranty length sensitivity coefficient on optimal decision variables. From the sensitivity analysis, these parameters have a different substitution effect on the optimal decision in each channel. The price and extended warranty length offered in a dual channel positively correlate with the market size and warranty length sensitivity coefficient of the corresponding channel. However, they negatively correlate with the price sensitivity coefficient. Accordingly, a similar situation occurs for the profit of each channel. Last, the discussion supports the theoretical results and generates managerial insights for practical decision-making