Joint Pricing and Inventory/Production Decisions in a Two-Stage Dual-Channel Supply Chain System

The Internet is becoming increasingly important as a sales channel. Thus, most large retail firms have adopted a multi-channel strategy that includes both web-based channels and pre-existing off-line channels. Since competition exists between these two channels, for a supply chain with a dual-channel retailer, pricing in one channel will affect the demand in the other channel. This subsequently affects the retailer’s replenishment (ordering) decisions, which have an impact on the producer’s inventory/production plans and wholesale price decisions. It is clear then that pricing decisions and inventory/production decisions are interacting in each member of the supply chain and among the members in the chain as well. Thus, competition should play an important role when considering pricing strategies and inventory/production decision in a supply chain with dual-channel retailers. However, it is usually ignored. In this paper, we consider joint pricing and inventory/production decision problems for members in a monopoly two-stage dual-channel retailer supply chain. We analyze the problems by incorporating intra-product line price interaction (competition) in the EOQ model. We show that a unique equilibrium exists under certain realistic conditions. We also provide numerical results that offer insights for pricing strategies for the dual-channel retailer supply chain and for product design for different channels. Our main findings are summarized as follows. Price pooling effect is found between online store and off-line store as the degree of substitution increases. The same observation holds for the wholesale prices. This provides managerial implications on pricing for different product category in online store and off-line store. The EOQ of the off-line store decreases with the degree of substitution; the EOQ of online store, on the other hand, increases with the degree substitution. This provide some guidance on inventory replenishment policies when intrachannel competition exists. It is also interesting to see that the total retail profit and the supplier’s profit can either increase or decrease with the degree of substitution, depending on the production costs and self-sensitivity of demands.