Pricing, Quality, and Stocking Decisions in a Manufacturer-Centric Dual Channel

Abstract

Problem description. We consider a dual channel in which a focal manufacturer (he) sells his output through his online store and an independent brick-and-mortar retailer (she). In this manufacturer-centric dual channel, we study product line, stocking, and pricing decisions in the presence of stochastic demand and inventory constraints. The pricing decisions include choosing whether to give price match guarantees (PMGs), standard in the U.S. retail practice. Methodology/Results. We analyze a game-theoretic model in which a focal manufacturer designs a product line, sets wholesale prices, and decides what products to sell in the dual channel. An independent brick-and-mortar retailer responds to the product line design and the wholesale prices by making stocking decisions in her store. Then, both stores observe demand and independently set retail prices subject to any PMGs that the stores gave to consumers. The brick-and-mortar store (online store) fulfills demand in a make-to-stock (make-to-order) fashion. We find that whenever one of the stores holds a competitive advantage, the manufacturer sells the same product line in both stores. If the brick-and-mortar store holds an advantage, it matches the online store’s retail price to obtain favorable wholesale pricing from the manufacturer. We find no equilibria where the online store price matches the brick-and-mortar store or the stores’ prices match each other. Finally, when neither store has a clear advantage, the manufacturer mitigates price competition by designing a different product for each store. Managerial implications. Our model helps identify optimal stocking and pricing strategies that depend on e-fulfillment cost and demand uncertainty and offers a novel reason for offering PMGs in a supply chain.