Timing of sales commitment in a supply chain with manufacturer-quality and retailer-effort induced demand

Abstract

A manufacturer can costly invest in new technology to enhance the product quality and a retailer can enroll more sales forces to improve the sales effort level. Although both activities can effectively increase the market demand, the outcome from quality enhancement is generally uncertain and influenced by some random factors. This paper investigates the timing effect of retailer's commitment of sales effort on the firms' equilibrium investment and pricing decisions in a decentralized supply chain. We consider two different scenarios: early commitment and delay commitment, depending on whether the retailer's commitment of sales effort is before or after the manufacturer's enhanced quality level is resolved. It shows that under the delay commitment scenario, both the manufacturer's and the retailer's investment levels become higher than that under the early commitment scenario. This subsequently leads to higher payoffs for the retailer and the supply chain under the delay commitment scenario. However, from the manufacturer's perspective, either timing scenario could be the dominant option, which is dependent on the magnitude of quality enhancement variability. Interestingly, the manufacturer prefers delay commitment when the quality enhancement variability is sufficiently high, which implies that he may voluntarily prefer to personally endure the entire quality risk when its level gets higher.