Supply chain coordination in quality improvement with reference effects

Abstract

With increasing public attention on product quality, supply chain quality management has been the focus of considerable research attention in recent years. However, only a few published articles have considered reference effects in supply chain quality management. In practice, reference effects influence consumer purchasing behaviours. Therefore, we have developed a dynamic model that incorporates the effects of the reference quality and reference price on the demand function of a ‘single-supplier single-manufacturer’ supply chain system. In our model, the demand function is assumed to be influenced by the reference price and reference quality. The reference price formation is assumed to be affected by the gap between quality and the reference quality. By utilizing differential game theory, we calculate and compare the open-loop equilibrium quality levels in two different scenarios: (i) Each channel member makes decisions within a subsidy programme and (ii) the supplier vertically integrates with the manufacturer. In addition, a total cost-sharing contract based on quality improvement efforts is proposed and proven to be effective in the supply chain system that is under consideration.