Dynamic pricing and channel efficiency in the presence of the cost learning effect

This paper investigates the impacts of the supply-side cost learning effect on dynamic pricing strategies and the channel efficiency in a decentralized supply chain consisting of a manufacturer and a retailer. The unit production cost incurred by the manufacturer declines as the cumulative output increases. With the manufacturer being the price leader, the interactions between the two channel members are modeled as a Stackelberg differential game, where the two channel members dynamically set the wholesale and retail prices over time to optimize their respective profits. We find that while the cost learning effect is beneficial to both channel members in terms of long-term profitability, such an effect is detrimental to the channel inefficiency caused by price double marginalization. In a setting where the manufacturer sells through competing retailers, we show that the channel efficiency can be improved with the emergence of horizontal competition. Our result also indicates that the channel efficiency with a feedback pricing equilibrium is higher than that with an open-loop equilibrium.