Price and warranty competition in a duopoly distribution channel: dynamic stability analysis for boundedly rational agents

Abstract

In this paper, we study competition and coordination issues in a duopoly distribution channel where two boundedly rational agents compete on their retail price and warranty policy. The paper analyses the dynamics of competition for three different possible cases where retailers compete: (i) exclusively on price, (ii) exclusively on warranty duration and (iii) both on price and warranty duration. We show that price and warranty competition are dynamically stable in nature under certain condition(s). In such cases, each competition model converges to an equilibrium. However the speed of the parameter adjustment determines how quickly the dynamic game will reach equilibrium and the paper analyses the stability of such an equilibrium. The model is illustrated through a numerical study and the results show that though coordination enhances system profit, it may affect the consumers with higher product price and lower warranty duration. Hence, in some cases, competition serves the firms better than coordination, particularly in terms of ‘social welfare’.