Evaluation of Marketing-Pricing Decisions in a Two-Echelon Supply Chain

Abstract

© 2013, Inzinerine Ekonomika-Engineering Economics. All right reserved. This paper discusses the interaction between one manufacturer and a single retailer in a channel in which both are willing to optimize their profit by adjusting pricing and advertising decisions. The manufacturer produces and sells a product at wholesale price to the retailer who in turn distributes it to consumers with retail price. The market demand is simultaneously affected by retail price, brand advertising of the manufacturer, and local advertising of the retailer. A Cobb-Douglas demand function is used to demonstrate the relationship between the parameters. Decision variables are two firms’ prices and their advertising investments. The problem is modelled under integrated policy and Stackelberg game. Also, we examine Retail Fixed Markup (RFM) policy and investigate its performance on supply chain. Then, the solution under three policies compared by numerical study, and the Pareto-efficient strategy is derived. We found numerically that a properly designed RFM policy improves each member’s profit and leads to Pareto improvement over Stackelberg policy. Besides, it improves the total supply chain’s profit by 600% in average comparing to Stackelberg policy.