Pricing and investment decisions when facing heterogeneous customers under different supply chain power structures

Abstract

This paper examines the pricing and joint investment decisions of a two-echelon supply chain with a manufacturer and a retailer under power structures. A manufacturer invests in a specific quality level to produce a quality product. Meanwhile, a retailer invests in the extended warranty service provision as an after-sales service. This study investigates the interplay of these two investments assuming two heterogeneous customer demands exist. Three decision-making analytical power structure models are developed, namely centralized, manufacturer-led decentralized, and retailer-led decentralized models. In both decentralized models, the Stackelberg game determines the optimal price and investment decisions to maximize member's profit. However, independently optimal decision-making with these models does not coordinate the supply chain and its members. Thus, this study proposes wholesale price contracts considering power structures to coordinate effectively and achieve a win–win situation. A numerical analysis has been performed to determine the optimal level for quality investment, extended warranty length, pricing, and supply chain performance. Furthermore, a sensitivity analysis explores key parameter's impact on heterogeneous customer demands and supply chain performance.

Keywords

• Coordination mechanism
• Extended warranty service
• Power structure
• Quality investment
• Supply chain design
• Wholesale price contract