Pricing strategy for a two-echelon supply chain with optimized return effort level

Abstract

This paper studies a supply chain consisting of one supplier and n retailers. The market demand for each retailer is assumed to be dependent on the difference between the retail price and the average retail price. The supplier considers two wholesale price strategies. In the first strategy, Strategy I, the wholesale prices to all n retailers are the same. In the second strategy, Strategy II, different wholesale prices are given to the retailers on the basis of the effort levels they required on products. The retailers who face retail price-dependent demand have different unit sales costs and determine their effort levels according to their different unit return service costs. We first model the retail price competition behavior of n retailers under the two wholesale price strategies. Then the retailers' optimal retail prices and the supplier's optimal wholesale price in each model are derived using a game theoretic approach. The effects of some key parameters on supply chain decisions and profit are investigated. The properties of retailers' (supplier's) optimal profits under the two wholesale price strategies are studied.