Supply Chain Dynamics and Channel Efficiency in Durable Product Pricing and Distribution

This study extends the single-period vertical price interaction in a manufacturer-retailer dyad to a multi-period setting. A manufacturer distributes a durable product through an exclusive retailer to an exhaustible population of consumers with heterogeneous reservation prices. In each period, the manufacturer and retailer in turn set wholesale and retail prices, respectively, and customers with valuation above the retail price adopt the product at a constant (hazard) rate. We derive the open-loop, feedback, and myopic equilibria for this dynamic pricing game and compare it to the centralized solution. Although in an integrated supply chain a forward-looking dynamic pricing strategy is always desirable, we show that this is not the case in a decentralized setting, because of vertical competition. Our main result is that both supply chain entities are better off in the long run when they ignore the impact of current prices on future demand and focus on immediate-term profits. A numerical study confirms that this insight is robust under various supply-and demand-side effects. We use the channel efficiency corresponding to various pricing rules to further derive insights into decisions on decentralization and disintermediation.