Dynamic pricing and inventory management of a dual-channel supply chain under different power structures

Abstract

This paper studies a periodic review, joint dynamic pricing and inventory problem for a dual-channel supply chain with one manufacturer and one retailer, where the demand is stochastic and price sensitive. Three possible power structures between manufacturer and retailer in the dual-channel supply chain, i.e., Manufacturer Stackelberg, Retailer Stackelberg and Vertical Nash, are considered. Under each of the three power structures, decision models are developed with stochastic dynamic programming to determine how to adjust the pricing and inventory decisions in every period so that each member’s total expected discounted profit over the planning horizon is maximized. The effects of the power structure are analyzed by comparing the optimal dynamic pricing and inventory policies under different power structures. Our main findings include: (i) the optimal dynamic pricing and inventory policy of a dual-channel supply chain is an inventory-dependent base-stock-list-price policy; (ii) base stock levels and reduced prices are affected by starting inventory levels; (iii) the influence rules on reduced prices under different power structures are the same, while the influence rules on base stock levels vary according to the power structure; (iv) optimal pricing and inventory decisions are affected by the power structure, although the structural properties of the optimal policies under different power structures are the same. Results from numerical examples show that, for the two-period dual-channel supply chain, manufacturer and retailer prefer Vertical Nash when the wholesale price is low, while they prefer Manufacturer Stackelberg when the wholesale price is high.