The Interplay between Probabilistic Selling and Demand Cannibalization in Supply Chains for Vertically Differentiated Markets: A Game-Theoretic Analysis Perspective

Abstract

The increasing popularity of information technology has generated many innovative product marketing strategies. To facilitate the sustainable development of the probabilistic selling strategy, we developed a game-theoretic model incorporating a manufacturer and a retailer to explore whether and when they should implement a probabilistic product and examine its effect on supply chain performance in vertically differentiated markets. First, the marketing strategy preference is closely related to product quality differentiation and the demand cannibalization effect. While a retailer benefits from adopting probabilistic selling (PS) regardless of quality differentiation, the manufacturer prefers traditional selling (TS) under certain market conditions. Second, the PS strategy increases the retailer’s profit from low-quality products by adjusting prices, though the manufacturer benefits only under certain conditions. Third, demand cannibalization intensifies with weak quality differentiation and low wholesale price discount, and a “win-win” situation is achieved only when product heterogeneity is limited. Furthermore, we provide managerial implications for supply chain members when PS is employed as a marketing strategy.

Keywords

Probabilistic selling / vertical differentiation / demand cannibalization effect / supply chain management

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Systems Engineering Society of China and Springer-Verlag GmbH Germany

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