Optimal retail price and service level in a dual-channel supply chain with reference price effect

Abstract

<p style='text-indent:20px;'>We study the optimal retail price and service level in a dual-channel supply chain in which the manufacturer may sell products through its online channel and offline retailer. Consumers with channel preference make their purchasing decision based on retail price, service level and channel valuation difference. We consider the reference price effect into a Hotelling utility function to formulate the competition of retail price and service level. We analytically derive the unique equilibrium separately in three power structures: (1) Manufacturer-led Stackelberg game (MS), (2) Retailer-led Stackelberg game (RS) and (3) Nash game (N). Particularly, we characterize the impacts of channel valuation difference and reference price effect intensity on the optimal decision and expected profit. In contrast to the previous literature on the dominance of the supply chain in that the dominance always can raise the dominant enterprise's profit, our findings indicate that supply chain members with channel advantages and channel disadvantages have different preferences for power structure. The member with channel disadvantages should give up dominance. Only when channel valuation difference is significant or reference price effect intensity is weak, the member with channel advantages will fight for dominance. Nash game is highly competitive in that the members only earn less profit. Numerical examples verified theoretical results.</p>