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3167. Pricing and procurement policies of two substitutable products under supply disruption risk
Invited abstract in session WB-61: Retail Cooperation and Competition, stream Retail Operations.
Wednesday, 10:30-12:00Room: S10 (building: 101)
Authors (first author is the speaker)
| 1. | Mehmet Sencer Zengin
|
| Industrial Engineering, Middle East Technical University | |
| 2. | Özgen Karaer
|
| Industrial Engineering, Middle East Technical University | |
| 3. | İsmail Serdar Bakal
|
| Industrial Engineering, Middle East Technical University |
Abstract
We study a supply chain that is composed of a manufacturer and a retailer. The retailer sells two vertically differentiated and substitutable products to the market and the products are supplied by the manufacturer. The lower-quality product has a stable supply, and thus, its wholesale and retail prices are assumed to be exogenous. The innovative (i.e., ‘high-quality’) product’s price is yet to be determined and its procurement/production is prone to supply disruption risk. We explore the optimal procurement quantities of both products and pricing decisions of the higher-quality product. As for the sequence of events, first, the manufacturer decides the wholesale price of the innovative product. Then, after observing this price, the retailer determines the order quantities of both products. Afterward, the innovative product is supplied or not with a certain probability. Finally, the retailer determines the retail price of the innovative product if no disruption and customers make purchase decisions.
We find that the market potential of the lower-quality product, which is determined by the quality perception and the retail price of that product, plays a crucial role in the optimal policies. When this potential is low, the innovative product is more inclined to be abandoned as its quality gets closer to the lower-quality one. Also, a precautionary stock of the lower-quality product should be kept to make up for a potential disruption of the innovative product.
Keywords
- Game Theory
- Supply Chain Management
Status: accepted
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