Dynamic ordering and pricing strategies in a two-tier multi-generation durable goods supply chain

Abstract

Abstract This paper considers the problem of dynamic pricing and ordering decisions for a durable product with multiple generations in a supply chain with one manufacturer and one retailer. The manufacturer introduces a new generation of the durable product before the last generation exits from the market. Demands for the product are quality- and price-sensitive. For each generation, the manufacturer determines the wholesale price and quality level; the retailer decides order quantity of the generation and its retail prices in every purchase period. Both the manufacturer and the retailer want to maximize their respective expected profits. In order to study the impact of consumer's behavior on a decentralized supply chain, our model uses a more accurate purchase probability according to a consumer's past purchasing experience to reflect a quality- and price-sensitive demand. We show that the retailer's optimal pricing strategy exists and depends only on the consumer's quality- and price-sensitivities for a given product quality. We also show that there is an optimal ordering strategy for the retailer. Consequently, the manufacturer projects a quality level and a wholesale price according to the retailer's optimal strategies. We use a numerical example to illustrate our results.