Dynamic Price Interactions in a Distribution Channel

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)32_Refereed conference paper (no ISBN/ISSN)Not applicablepeer-review

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Original languageEnglish
StatePublished - 12 Jun 2008

Conference

Title2008 INFORMS Marketing Science Conference
PlaceCanada
CityVancouver
Period12 - 14 June 2008

Abstract

When a manufacturer and its retailer are involved in setting prices dynamically in distributing a product over time, not only do they inter-temporally compete against themselves, but they also compete against each other to maximize their benefits. To investigate the issues related to channel dynamics in new product pricing and distribution, we extend the analysis of traditional double-marginalization problem to an inter-temporal dynamic setting. Our game-theoretical model analytically generates a number of managerially important insights: (1) Prior empirical study has suggested that managers in many situations are compelled to engage in myopic marketing management by replacing marketing strategies that produce superior future profits with those that generate an immediate payback. Although such a short-term focused behavior is typically considered as detrimental from a long-term perspective, we show that firms in a distribution channel can benefit from pricing myopia if their objective is to maximize the net profit over the entire selling horizon. (2) While pricing myopia can improve channel efficiency, when the channel members have discretion to choose between myopic and forward-looking pricing rules, we show that their bounded rationality will lead them to be forward-looking, and thus they are trapped into a prisoner's dilemma. (3) We show that strategic decentralization could lead to increased long-run profitability for an integrated channel when the pricing managers are more focused on the short-term profits. Past research has shown how decentralization can mitigate inter-brand competition and intra-brand competition. We add another upside of decentralization by showing that it can mitigate inter-temporal competition.

Citation Format(s)

Dynamic Price Interactions in a Distribution Channel. / CHIANG, Wei-yu.

2008. Paper presented at 2008 INFORMS Marketing Science Conference, Vancouver, Canada.

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)32_Refereed conference paper (no ISBN/ISSN)Not applicablepeer-review