Faculty of Business Administration
Decision Sciences
Sell Directly or Indirectly? Channel Structure and Dynamic Pricing with Strategic Customers
Prof. Sean X. Zhou
Associate Professor
Department of Decision Sciences and Managerial Economics
CUHK Business School, The Chinese University of Hong Kong

This paper studies how channel structures interact with dynamic pricing strategies and impact the profitability of firms selling to strategic customers. We consider a dual-channel supply chain where a manufacturer sells a seasonal product to strategic customers through both an independent retailer and its direct channel over a finite selling season. During each period, the manufacturer and the retailer sequentially set the wholesale and retail prices, and then the manufacturer charges the same retail price in its direct channel. Customers are heterogeneous in their valuation of the product and strategically decide whether and when to make the purchase. We derive the unique sub-game perfect Nash equilibrium of this dynamic game in explicit recursive expressions. In equilibrium, price skimming arises in the retail price; the wholesale price, however, may increase in the last period when customers are sufficiently strategic. To see the impact of strategic customer behavior under different channel structures, we further analyze centralized and decentralized single-channel models. Numerically we observe that the dual-channel system incurs less (more) percentage profit loss due to strategic customer behavior than the centralized (decentralized) single channel, which implies that introducing an indirect (direct) channel makes the system less (more) vulnerable to the negative impact of the strategic behavior of customers. We also study and compare the effects of price commitments under both single-channel and dual-channel settings. Among other findings, in the decentralized single channel, both firms are worse-off by committing to myopic price paths (assuming that customers are myopic); however, such price commitment can benefit the manufacturer in the centralized single-channel and dual-channel systems if customers are not very strategic. Finally, an extension where customers value the purchase from two channels differently is analyzed. One interesting observation is that the dual-channel system becomes less negatively affected by the strategic customer behavior. This is joint work with Qianbo Yin and Xiye Xue.

Date: January 28, 2015 (Wednesday)

Time: 10:30~12:00

Venue: Faculty of Business Administration, E22-2011

A Short Biography of Prof. Zhou

Prof. Sean Zhou is currently an Associate Professor in Department of Decision Sciences and Managerial Economics, CUHK Business School, the Chinese University of Hong Kong. He is also the Director of the Supply Chain Research Center under the Asian Institute of Supply Chain and Logistics in CUHK. He received his B.S. in Electrical Engineering from Zhejiang University, China in 2001, and his M.S. and Ph.D. in Operations Research from North Carolina State University in 2002 and 2006, respectively. His main research area is supply chain management with particular interests in inventory control, production planning, pricing, and game theoretic applications.