Two-period pricing strategy in a supply chain with intertemporal and horizontal reference price effects

Abstract

In practice, before purchasing products, customers would compare the current price with past observed prices (referred to as the intertemporal reference price effect) and retail prices of other sellers (referred to as the horizontal reference price effect). This study considers a two-period supply chain with one manufacturer who sells a product through two competing retailers. We assume that the manufacturer acts as the Stackelberg game leader, and both retailers act as followers. The manufacturer can quote the same or different wholesale prices for the two retailers, whereas both retailers can employ a pre-announced or responsive pricing strategy. We study the impact of intertemporal and horizontal reference price effects on the selection of pricing formats. Our results show that both retailers and manufacturers can benefit from intertemporal effects. However, the horizontal effect hurts the retailer’s profit, but still improves that of the manufacturer. In equilibrium, the manufacturer sets different wholesale prices to retailers who would employ the pre-announced pricing strategy. Finally, we find that the intertemporal reference price effect plays a key role in the pricing strategy equilibrium of the manufacturer and retailers. Our results complement the dynamic pricing strategy literature and provide new managerial implications for supply chain management. Highlights Pricing format selection problems with IRPE and HRPE are investigated. IRPE hurts the payoff of both retailers but improves the manufacturer. In equilibrium, the manufacturer prefers the strategy “DP”. IRPE plays an important role in pricing format selecting than HRPE.