Optimizing Hybrid-Channel Supply Chains with Promotional Effort and Differential Product Quality: A Game-Theoretic Analysis

Abstract

Many manufacturers sell products of differential quality to retailers or directly to consumers, and the retailers might promote high- or low-quality products. Given different channel structures, how can the supply chain be optimized? We developed a game-theoretic framework with a manufacturer and retailer as a leader and follower, respectively, and the retailer makes the promotional effort. We examined the effects of product quality, promotional effort, and hybrid channels on the supply chain performance in four dual-channel structures. We found that, regardless of qualities, retailers generally prefer to engage in the promotion even though manufacturers are reluctant to share promotional costs. However, promotional effort does not always improve the supply chain profit across channels, and there is an interaction between product-channel structure and promotional effort. The preferences of manufacturers and retailers in all feasible regions of quality levels within the aforementioned structures can be ranked. There exists a feasible region of quality levels where the supply chain can achieve the Pareto improvement without any additional coordination mechanism, and both players prefer the channel structure (Π4) that retailers sell high-quality products with promotional effort. Moreover, the extended analysis suggests that the less significant the product variety is, the less effort is made by the retailer to promote the products.