Pricing and shelf space decisions with non-symmetric market demand

Abstract

We discuss a pricing and shelf space size decision problem in a single retailer-two manufacturer supply chain where products from two different manufacturers have non-symmetric market demand functions. The retailer decides on the size of the available shelf space and the retail price for each product, while the manufacturers determine the wholesale prices for their own products. The linear demand function by Shubik and Levitan (1980) is extended to incorporate the non-symmetric market potential, production costs, and cross-price sensitivity. Mathematical models are developed to determine the optimal shelf space and retail and wholesale price, and to analyze how differences in the market potential, production cost and cross-price sensitivity of the products affect the optimal solutions. The study results show that a firm can adopt a mixed strategy of using the influence of the market potential and cross-price sensitivity simultaneously to achieve a pre-specified profit. We also show that a manufacturer can use a product differentiation strategy to offset the impact caused by an increase in production cost. Moreover, shelf space management should act in accordance with any change in the production cost of the products in the same category. We also find that the retailer can control the influence of a product׳s market potential and production cost on the total demand and retail prices via the shelf space cost management. Our model is the first to illustrate the interaction effect of non-symmetric market potential, production costs, and cross-price sensitivity.