Price coordination in distribution channels: A dynamic perspective

Abstract

In this study, we investigate two important questions related to dynamic pricing in distribution channels: (i) Are coordinated pricing decisions efficient in a context where prices have carry-over effects on demand? (ii) Should firms practice a skimming or a penetration strategy if they choose to coordinate or to decentralize their activities? To answer these questions, we consider a differential game that takes place in a bilateral monopoly where the past retail prices paid by consumers contribute to the building of a reference price. The latter is used by consumers as a benchmark to evaluate the value of the product, and by firms to decide whether to adopt a skimming or a penetration strategy.We then compute and compare strategies, total channel profits and individual profits under vertical integration and decentralization at steady state and along the optimal time-paths. One of our main findings states that, for some values of the initial reference price, there is a time interval where channel decentralization performs better than coordination. During this transition period, at least one of the channel members could be tempted to end his cooperation, especially if he is not farsighted and if there are no binding agreements with the other channel partners.

Myopic versus Far-Sighted Behaviors in Dynamic Supply Chain Coordination through Advertising with Reference Price Effect

“…Zhang et al [20] formulated a differential equation in a bilateral monopoly market to study the pricing strategies in two distribution channels; they concluded that it is beneficial for the competitive supply chain to boost a higher initial Discrete Dynamics in Nature and Society 3 reference price. Benchekroun et al [5], Martín-Herrán et al (2012) [21], and Martín-Herrán and Taboubi (2015) [22] studied the reference price and the relative pricing strategies in the context of the supply chain. Most of the previous papers considered the reference price as an exponentially decaying weighted average of the past observed prices and neglected the operation factors which affect the reference price.…”

Implications for Firms with Limited Information to Take Advantage of Reference Price Effect in Competitive Settings

“…Popescu and Wu [12] studied the dynamic pricing problem of a monopolist firm under a discrete time model; they showed that if consumers are loss averse, optimal prices will converge to a constant steadystate price, otherwise, optimal policy cycles. Martín-Herrán and Taboubi [13] investigated whether the results on the efficiency of price coordination in bilateral monopolies still hold when the reference price effect is taken into account. They showed that, for some values of the initial reference price, there is a time interval where channel decentralization performs better than coordination.…”

“…The exponential smoothing model, stemming from the adaptive expectation model, is the most commonly used updated model for reference price (see [12,13,25,48]):…”

“…Based on this comprehension, scholars have provided various implications for firms to take advantage of reference price effect [10][11][12][13][14][15][16][17]. These studies provided critical implications for firms to maximize their revenues via making use of reference price effect.…”

Sales effort deployment in decentralized dual-channel distribution

“…They found the optimal wholesale price and retail price could always maximize the manufacturer's profit. Martín-Herrán and Taboubi (2015) investigated the pricing strategy of the dual-channel distribution in a dynamic approach. They found there is a time interval where a dual-channel distribution with an independent retailer performs better than a dual-channel distribution with retail channel controlled by a manufacturer.…”