Pricing Decisions in a Heterogeneous Dual-Channel Supply Chain Under Lead Time-Sensitive Customer Demand

Abstract

Internet facilities helped retailers to sell through online channels, and as a result, e-tailers rose into prominence and started competing with retailers. But, the e-commerce industry always confronted the issue of lead delivery time, hindering the growth of many e-tailers. We observed scant literature that studies the impact of delivery lead time on a dual-channel supply chain consisting of retailer and e-tailer. This research paper uses game theory to verify the impact of delivery lead time on pricing decisions of a heterogeneous dual-channel supply chain consisting of the manufacturer, retailer, and e-tailer. We used the Stackelberg game to study the manufacturer’s and downstream partners’ interaction: retailers and e-tailers. A horizontal Nash game was used to model the interaction between the downstream partners. We had analytically modeled how the lead delivery time significantly affects the channel partner’s optimal pricing, sales volume, and profitability. We also did sensitivity analysis to check the influence of the customers’ channel preference coefficient toward a particular channel and its cross-effects on the pricing policies when the customer is also lead time-sensitive. The study revealed that irrespective of large delivery time or next day delivery time, customers’ preference toward a particular channel didn’t affect the manufacturer’s profit, whereas it affected the profit of the retailer and e-tailer. On the other hand, the increase in lead time-sensitivity coefficient severely affected the profit of all the supply chain partners. By analyzing the pricing decisions, we found that both the customer preference and lead time-sensitivity coefficients affected the pricing decisions, but customers’ channel preference coefficient failed to mitigate the effect of lead delivery time. The inputs from this study can be used by practicing managers to develop decision support systems and as an input in multi-agent systems for converting lead time-sensitive supply chains to robust and resilient ones.