Dynamic Slotting and Pricing Decisions in a Durable Product Supply Chain

Abstract:     
We consider a supply chain in which a manufacturer sells an innovative durable product to an independent retailer over its life cycle. We assume that the product demand follows a Bass-type diffusion process, and it is determined by the market influences, retail price of the product, and shelf space allocated to it. We consider the following retailer profit optimization strategies: (i) the myopic strategy of maximizing the current-period profit and(ii) the far-sighted strategy of maximizing the life-cycle profit. We characterize the optimal dynamic shelf-space allocation and retail pricing policies for the retailer and wholesale pricing policies for the manufacturer. We also compute these policies. Surprisingly, we find that the manufacturer, and sometimes even the retailer, is better of with a myopic retailer strategy in some cases.

Number of Pages in PDF File: 40

Keywords: Stackelberg differential games, the Bass model, pricing, slotting, supply chain management, open-loop policies, durable products

JEL Classification: C61, M31, M37, M31,M00, C71, C73

Accepted Paper Series