Optimal pricing in mass customization supply chains with risk-averse agents and retail competition

Abstract

We analytically investigate the optimal pricing decisions in a mass customization (MC) supply chain with one risk averse manufacturer and two risk averse competing retailers. The manufacturer is the Stackelberg leader, which offers a wholesale pricing contract to the retailers. After receiving the wholesale price, each retailer decides the retail selling price for the MC product simultaneously. We first prove the existence of a unique pricing equilibrium and then derive the optimal prices. After that, we focus our attention on exploring how the degree of risk aversion of each supply chain agent affects the optimal prices as well as consumer welfare, supply chain profitability, and credit deposit under a competitive setting. We find that a more risk averse manufacturer will offer a lower wholesale price, which leads to lower retail selling prices offered to the market. For the retailers, if a retailer is more risk averse, it will make the manufacturer offer a higher wholesale price and it will set a lower retail selling price; however, whether the competing retailer will increase or decrease the retail selling price depends on the level of competition. We examine the impacts brought by the market demand uncertainties as well as the respective demand correlation. We conclude by revealing that in the sufficiently competitive market environment, consumers enjoying MC services are benefited more but the supply chain profitability may decrease more (depending on how risk averse the agents are) when (i) the manufacturer and retailers are more risk averse, (ii) demand uncertainties and the correlation between market demands are higher. We also find that the retailers need to pay more credit deposit if the manufacturer is more risk averse or the demand correlation is higher. Finally, we consider the MC product improvement scheme in the extended model and reveal that it is a Pareto improving optimal measure if the supply chain agents are not too risk averse and the increment in production cost is sufficiently small.