Pricing decisions in a dual channels system with different power structures

Abstract

This paper investigates the effect of product substitutability and relative channel power on pricing decisions under different power structure of a dual exclusive channel system where each manufacturer distributes its goods through a single exclusive retailer but two goods are substitute. A linear demand based on the utility function of a representative consumer is assumed, and three game scenarios on power structures are examined under symmetric and asymmetric related channel powers. It is shown that no power structure is always the best for the entire supply chain though all members on supply chain have incentive to lead the Stackelberg game. Meanwhile, the vertical Nash game is an equilibrium for the members, however, a Prisoner's dilemma necessarily incurs for the entire supply chain because the Retailer Stackelberg or the manufacturer Stackelberg can gain the better performance than that in vertical Nash for the entire supply chain when the product substitutability is moderate or higher and the asymmetric relative channel power is moderate, while consumers always get the most welfare from the vertical Nash game.