Joint pricing, services and quality decisions in a dual-channel supply chain

Abstract

With the rapid development of the Internet, many manufacturers nowadays are increasingly adopting a dual-channel to sell their products,i.e., the traditional retail channel and online direct channel. In this paper, we focus on retail service, manufacturer’s direct service and quality effort, and present an analytical framework to examine the optimal decisions in dual-channel supply chain between the manufacturer and the retailer. Considering the efficacy of different supply chain structures, centralized and decentralized models are established. By using the backwards induction and the two-stage optimization technique in Stackelberg game, the corresponding analytical equilibrium solutions are obtained. Our analysis shows that the degree of customer loyalty to the direct channel strongly influences the manufacturer’s and the retailer’s services and quality strategies in the decentralized dual-channel supply chain, but not in the centralized model. Our results also point out that compared to centralized model, for any given selling price, the ratio of profit margins of selling one unit in the direct and retail channels determines the retailer’s service strategy; and the manufacturer will raise the level of direct channel service, but put less effort on quality improvement in the decentralized model. Finally, numerical examples present the contrasting view that disparate interests within a dual-channel supply chain can actually realize improving outcomes.