Optimal Pricing Strategies for a Manufacturer and a Value-Adding Retailer in a Dual-Channel Environment

Abstract

In this paper, we study a supply chain that consists of a manufacturer and a value-adding retailer that sell a product to customers through dual channels, i.e. a traditional channel (TC) and an online channel (OC). Observing that in practice, the manufacturer may or may not offer an OC guide price to the retailer and/or act as the leader in the supply chain, we discuss and compare two practical pricing strategies, with and without an OC guide price, under two different power configurations based on which member of the supply chain acts as the leader. Our results show that if the manufacturer does not provide a guide price, the retailer might/might not set a higher TC price than the two OC prices, depending on the level of migration effectiveness and the potential market demand. However, if the manufacturer does provide a guide price, the retailer will always charge a higher TC price than the guide price (or the two OC prices) when the retailer acts as the leader. Moreover, we show that the two players in the supply chain might or might not prefer the pricing strategies with an OC guide price. Our results also indicate that migration effectiveness harms the retailer’s profit, and the manufacturer may benefit from mild competition between the two channels. Finally, we show that regardless of whether the manufacturer chooses to offer an OC guide price or not, both the manufacturer and the retailer prefer to act as the follower for high migration effectiveness and the profit of the supply chain will increase when the retailer acts as the leader (for low migration effectiveness.

Keywords

Supply chain management / pricing strategy / Stackelberg game / dual-channel / value-adding

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