Warranty and price optimization in a competitive duopoly supply chain with parallel importation

Abstract

Gray market has always been an opposing challenge for manufacturers. Parallel markets tend to purchase the manufacturer's product at a lower price and resell it in another market with a higher price. In order to ameliorate the effects of parallel importation, the offering of a warranty for authorized channels is suggested as a competitive strategy. This paper considers two markets with different levels of willingness to pay. A manufacturer is present at both of these markets and offers the same product with different prices according to each market's willingness to pay. In the market with a lower willingness to pay, the manufacturer's product is not only purchased by a group of customers, but also by the parallel importer who later attempts to sell this product in the market with a higher willingness to pay. Moreover, in the market with lower willingness to pay, the manufacturer competes with another manufacturer that offers a similar product. A model for this problem is proposed when the manufacturer offers warranty as a competitive strategy against the parallel importer at the market with higher willingness to pay. Furthermore, a numerical example and a sensitivity analysis for the model are presented. Additionally, due to the practicality of this problem, managerial insights are included at the end of this research work.

Game theory in supply chain management: current trends and applications

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Joint optimal decisions on pricing and warranty policy of duopoly supply chain with one common retailer

“…Lu et al [18] examined a pricing and warranty decisions problem in a two-echelon dual supply chain model. Taleizadeh et al [19] analyzed two markets with different level of willingess to pay for product with a common manufacturer at both markets who offers warranty as a competing factor when a third party distributer acts as a gray market. However, most of the studies which consider warranty as the effective strategy to boost the sales tend to ignore warranty cost as the function of product quality, and consider warranty cost as the function of length of warranty period and failure rate.…”