Pricing and advertising decisions in a dominant-retailer supply chain: A multi-follower bi-level programming approach

Abstract

Pricing and advertising is one of the most important decisions in each supply chain, especially in the competitive environment. In previous studies, this has been a centralized decision. However, if each channel member makes decision independently, the utility of all members is optimized. In such decentralized situations, channel members may have different market power to influence other members' decisions. These issues can be modeled through leader-follower Stackelberg game or bi-level programming. This study investigates coordination of pricing and cooperative advertising in a two-stage supply chain consisting of one dominant retailer and multiple competitive manufactures, producing several perishable and substitutable products. This paper aims to determine pricing and cooperative advertising decisions expenditure as well as the amount of manufacturers' production or retailer's purchase, such that the utility of all members is met. Hence, the problem is modeled as a multi-follower bi-level programming problem. Since it is proved that the model is NP-hard, the proposed model is solved through simulated annealing. A numerical example is used to show the impact of demand's variations on the members' decisions.