When and what wholesale and retail prices should be set in multi-channel supply chains?

Kenji Matsui

doi:10.1016/j.ejor.2017.11.069

Abstract

This paper investigates the optimal timing and level of wholesale and retail prices set in multi-channel supply chains, where a manufacturer produces and sells products to retailers that compete to resell the products, by applying the framework of an observable delay game devised in noncooperative game theory. We assume that one manufacturer and two retailers, which constitute a two-echelon supply chain, can select not only the levels of wholesale and retail prices, respectively, but also the timing of pricing. Our analysis of a dynamic game composed of discrete periods provides two useful conclusions for operational decision support. First, the manufacturer must simultaneously set its wholesale prices for products that are sold to separate retailers at the same time. Second, in contrast to the simultaneous price setting by the manufacturer, the retailers must sequentially set respective retail prices at different times; thus, the retailers should stagger their timings for setting retail prices. We formally demonstrate that these timings of pricing decisions by the manufacturer and the retailers constitute a subgame perfect Nash equilibrium in the dynamic noncooperative game played by the three supply chain parties. Consequently, these conclusions can be used as practical guidelines for supply chain members choosing optimal timing of pricing.

Highlights

Nowadays, the management of multi-channel supply chains has become an increasingly critical issue for firms involved in supply chains in a variety of industries
The manufacturer must simultaneously set its wholesale prices of products that are sold to separate retailers at the same time
We formally demonstrate that these pricing decision timings by the manufacturer and retailers constitute a subgame perfect Nash equilibrium (SPNE) in the dynamic noncooperative game played by the three supply chain parties

Summary

Introduction

The management of multi-channel supply chains has become an increasingly critical issue for firms involved in supply chains in a variety of industries. While optimal timing of pricing is a generally important issue for supply chain members, the investigation of the timing is essential, especially when a manufacturer gradually develops new distribution channels Another feature associated with the framework of the observable delay game is that each player chooses one of the discrete periods as its decision timing, as well as the decision variable itself. Apple released its iWatch in September 2014, whereas the test model of iWatch had been shown to the public prior to the release, which indicates a delay in the marketing of the product (Phillips, 2014).1 These cases indicate that the optimal decision timing regarding the setting of the discrete pricing periods assumed in the framework of the observable delay game is important, especially when a manufacturing firm develops its distribution channels or markets a new product, because the firm may intentionally adjust the timing to make its decision. Pan (2017) provides several business cases in which manufacturers strategically control the timing of releasing new products

Literature review

Model description

Generalization: multiple finite periods case

Conclusion and discussion