Article ID: | iaor201113082 |
Volume: | 20 |
Issue: | 2 |
Start Page Number: | 268 |
End Page Number: | 279 |
Publication Date: | Mar 2011 |
Journal: | Production and Operations Management |
Authors: | He Xiuli, Gutierrez Genaro J |
Keywords: | simulation: applications, manufacturing industries, decision: applications, programming: markov decision, retailing |
We analyze the dynamic strategic interactions between a manufacturer and a retailer in a decentralized distribution channel used to launch an innovative durable product (IDP). The underlying retail demand for the IDP is influenced by word-of-mouth from past adopters and follows a Bass-type diffusion process. The word-of-mouth influence creates a trade-off between immediate and future sales and profits, resulting in a multi-period dynamic supply chain coordination problem. Our analysis shows that while in some environments, the manufacturer is better off with a far-sighted retailer, there are also environments in which the manufacturer is better off with a myopic retailer. We characterize equilibrium dynamic pricing strategies and the resulting sales and profit trajectories. We demonstrate that revenue-sharing contracts can coordinate the IDP's supply chain with both far-sighted and myopic retailers throughout the entire planning horizon and arbitrarily allocate the channel profit.