Pricing Strategies of a Traditional Retailer and a Direct Distributor When Consumers Hold Channel Preferences

Mathematical Problems in Engineering, Mar 2018

This paper studies the price game between a traditional retailer and a direct distributor who have different channel preferences. Both of the decision makers’ objectives are to maximize their individual expected utilities. We formulate the two decision makers’ utility functions and find out their corresponding equilibrium solutions after a game process. We conclude that the traditional retailer has an advantage over the direct distributor in the market full of unconstrained competition. The traditional retailer’s equilibrium price increases with the reduction of its consumer’s purchasing-intention sensitiveness to the distance of consumption. Based on the result, we find that the game is not able to arrive at the Nash equilibrium solution in certain situations. Moreover, the transportation cost and bargain cost strongly influence the equilibrium solutions of the price game if the market constraints become tighter. Along with the increasing tightness of the market constraints, it appears that both the traditional retailer and the direct distributor dynamically adjust their solutions according to the same strategy. Finally, we draw a conclusion and suggest the potential directions for future research.

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Pricing Strategies of a Traditional Retailer and a Direct Distributor When Consumers Hold Channel Preferences

Pricing Strategies of a Traditional Retailer and a Direct Distributor When Consumers Hold Channel Preferences Xiao Fu1 and Guanghua Han2 1Institute of Innovation and Development, Hangzhou Dianzi University, Hangzhou 310012, China 2School of International and Public Affairs, Shanghai Jiao Tong University, Shanghai 200030, China Correspondence should be addressed to Guanghua Han; nc.ude.utjs@auhgnaugnah Received 31 March 2017; Accepted 21 February 2018; Published 28 March 2018 Academic Editor: Josefa Mula Copyright © 2018 Xiao Fu and Guanghua Han. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Abstract This paper studies the price game between a traditional retailer and a direct distributor who have different channel preferences. Both of the decision makers’ objectives are to maximize their individual expected utilities. We formulate the two decision makers’ utility functions and find out their corresponding equilibrium solutions after a game process. We conclude that the traditional retailer has an advantage over the direct distributor in the market full of unconstrained competition. The traditional retailer’s equilibrium price increases with the reduction of its consumer’s purchasing-intention sensitiveness to the distance of consumption. Based on the result, we find that the game is not able to arrive at the Nash equilibrium solution in certain situations. Moreover, the transportation cost and bargain cost strongly influence the equilibrium solutions of the price game if the market constraints become tighter. Along with the increasing tightness of the market constraints, it appears that both the traditional retailer and the direct distributor dynamically adjust their solutions according to the same strategy. Finally, we draw a conclusion and suggest the potential directions for future research. 1. Introduction The rapid development of e-commerce has changed the traditional shopping patterns of consumers and the mode of traditional supply chain management. The traditional retail channel and the emerging Internet direct sales channel have gradually gained the attention of more consumers, manufacturers (such as the Haier Group), and operators (such as Suning). With the popularity of network information technology and smartphones and the improvement of national income levels, consumers’ consideration of sales price, time cost, and other factors has undergone great changes. For example, to some consumers, the direct sales channel with low prices is more attractive, while other consumers prefer the traditional channel, which allows them to have a try of the product and to buy it immediately. So, consumers’ preferences of sales channel will affect the market share of the traditional retailer and the direct distributor and thus significantly impact the price game between them. 2. Literature Review From the perspective of supply chain management, the research in the field of multichannel sales is divided into two main categories: the dual-channel game between the manufacturer and the traditional retailer and the dual-channel game between the direct sales channel and the retail channel; the main difference between the two games lies in whether market competition in the supply chain is vertical or horizontal. There are abundant researches about vertical competition in supply chain. Under the supply chain constituted by the upstream manufacturer and the downstream retailer, Chiang et al. [1] have analyzed the “one to one” game between the manufacturer and the retailer by characterizing the consumer market from two dimensions and by considering influences of the direct sales channel on manufacturers at different levels of consumption; these authors concluded that, compared to single-channel marketing, the multichannel model has lower retail prices and more demand and brings more profits for manufacturers. Boyaci [2] has utilized the random function to characterize consumer demand by adding the factor of inventory to the model, which leads to the increase of complexity in the model, and the corresponding price factor thus becomes the exogenous variable. Chiang and Feng [3] used the pricing and lot-sizing decisions of the Economic Order Quantity (EOQ) model to explore the strategic interactions between upstream and downstream supply chain members. In a paper that employed the Hotelling model to describe the consumer market, Cattani et al. [4] classified consumer preferences according to the traditional channel and the direct sales channel. Esteves and Vasconcelos [5] studied the interaction between horizontal mergers and price discrimination by citing the repeated purchase model with two periods and three firms, wherein firms may engage in Behavior-Based Price Discrimination (BBPD). Panda et al. [6] explored pricing and replenishment policies for (...truncated)


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Xiao Fu, Guanghua Han. Pricing Strategies of a Traditional Retailer and a Direct Distributor When Consumers Hold Channel Preferences, Mathematical Problems in Engineering, 2018, 2018, DOI: 10.1155/2018/7621039