Dynamic vs. static pricing in a supply chain with advertising

Abstract

With the rapid development of e-commerce, dynamic pricing, as a powerful tool to enhance company profits, has been widely adopted by companies worldwide. However, there are little researches which focus on the effects of dynamic pricing on supply chain performance. Noting that compared with the traditional retailer, it is easier for online retailer to implement dynamic pricing strategy, we consider a Stackelberg game between one manufacturer and one online retailer where the manufacturer, as the leader, decides the advertising effort and the wholesale price, and the online retailer, as the follower, sets the retail price. Specifically, the manufacturer simultaneously faces with the online retailer and an exogenous traditional distribution channel where both the wholesale price and the retail price are fixed and exogenous. Solving this differential game, we can obtain the equilibrium strategies. The results show that if the manufacturer prices dynamically, the manufacturer itself will be better off; however, the double marginalization will be aggravated, which is adverse to supply chain efficiency. In addition, the supply chain efficiency is the lowest when both the manufacturer and the online retailer price statically, and, interestingly, it is the highest when only the online retailer prices dynamically. Moreover, if the manufacturer prices uniformly, the equilibrium strategies of the manufacturer are independent of the pricing mode of the online retailer, i.e., static or dynamic. Additionally, dynamic pricing to some extent restricts the advertising investment.