Pricing Strategies of Complementary Products in Distribution Channels: A Dynamic Approach

This paper investigates the dynamic pricing strategies of firms selling complementary products in a marketing channel. The problem is modelled as a non-cooperative differential game that takes place between decisions makers controlling transfer and retail prices. We computed and compared prices and sales rates of channel members under two scenarios: (i) The first involves a single retailer that sells a unique brand produced by a monopolist manufacturer and (ii) in the second, a complementary product is introduced by an additional manufacturer. We found that in both scenarios, transfer and retail prices decrease over time, but prices decrease faster when the complementary product is introduced into the market. Furthermore, the entry of the complementary product onto the market boosts the sales rate of the existing product. Finally, we found that the retailer in the second scenario always has a non-negative retail margin, meaning that practicing a loss-leadership strategy is not optimal.