Pricing strategy in a dual-channel supply chain with overconfident consumers

Abstract

Caused by a cognitive bias, consumers tend to be overconfident and are overprecise in the valuation of products, which directly affects product demand and price. Many manufacturers nowadays sell products to consumers through retailers as well as the Internet, forming dual-channel supply chains. Determining the optimal wholesale, direct, and retail prices presents itself as an important issue in dual-channel supply chains. In this study, we investigate the optimal pricing strategies of a manufacturer and a retailer in a dual-channel supply chain with overconfident consumers. We first introduce the concept of consumers’ overconfidence level, in addition to consumers’ channel preference, and adopt consumer’s utility in demand modeling. Subsequently, we characterize the pricing strategies in the centralized and decentralized dual-channel supply chains and derive closed-form solutions to explore the impacts of consumers’ overconfidence on demand, chain members’ pricing decisions and profits. The results highlight that (1) the decentralized dual-channel supply chain demand decreases along with the increase of consumers’ overconfidence level, (2) the manufacturer and the retailer should set lower prices when consumers are more overconfident, (3) the manufacturer should set the same direct and wholesale prices in the decentralized dual-channel supply chain, and (4) the profits of the manufacturer and the retailer are reduced due to consumers’ overconfidence. Based on the numerical examples, we suggest several approaches to reduce consumers’ overconfidence, e.g., providing better retail service, in a hope of increasing the profits of the manufacturer and the retailer.