Pricing decisions for a social comparison product supply chain

Abstract

As a natural psychological tendency of human beings, social comparison is pervasive among consumers. However, while plenty of literature studied the role of social comparison in affecting consumer psychology empirically, few focus on the problem of social comparison in supply chains. This paper proposes a modified utility model in which a consumer has an intrinsic and social value from the social-comparison products. Furthermore, the social value incorporates two different consumer psychologies from social comparison: the assimilate effect from upward comparison and the contrast effect from downward comparison. Based on this model, we derive the firm’s price decisions for a social-comparison product supply chain consisting of a manufacturer and a retailer under two cases, the centralized case and the decentralized case. We find several interesting patterns of consumers’ behavior in the presence of social comparison. We also find that when consumers are highly sensitive to social comparison, the supply chain can be coordinated spontaneously using a simple wholesale price contract. Moreover, even when consumers are not very sensitive to social comparison, the wholesale and retail prices in a decentralized supply chain will significantly reduce compared to those for non-social-comparison products — social comparison can mitigate the double marginalization effect. Also, we obtain some other interesting managerial insights. For instance, while social comparison always benefits the manufacturer, it benefits the retailer under certain conditions. This paper contributes to the behavioral operations management literature by first revealing a new mechanism that coordinates supply chains through consumer social comparison.