Competition pricing between domestic and foreign manufacturers: a bi-level model using a novel hybrid method

Nowadays, due to globalization, many domestic manufacturers have gone bankrupt after foreign manufacturers’ products entering their market. Obviously, pricing on products plays a crucial role in maintaining the market share and profit of the domestic manufacturers. In this paper, a Stackelberg game using the bi-level programming model approach is presented in order to analyze a pricing problem in which two manufacturers, one foreign and one domestic, compete. The domestic and foreign manufacturers sell their products in a competitive environment considering three different market segments, respectively with high, medium and low income levels of customers. Also, the domestic manufacturer plays the role as the game leader and foreign manufacturer the follower. In this problem, mill price and quality of product are considered as effective factors on customers’ utility in each market. Furthermore, the customers’ buying tendency from each manufacturer in each market is captured by the multinomial logit model. To solve the proposed model, a hybrid method based on Lambert-W function and Path-Following method has been used. Then, in order to investigate the domestic manufacturer’s profit versus the foreign manufacturer’s profit, the optimal prices of manufacturers are calculated by using different instances, based on product’s price and product’s quality of each manufacturer. Finally, the results conclude that the market segmentation with respect to the income levels leads to an increase in the profit of the domestic manufacturer. The proposed method can improve the competitive advantage of the domestic manufacturer vis-à-vis the foreign manufacturer.