Stackelberg Equilibria in a Multiperiod Vertical Contracting Model with Uncertain and Price-Dependent Demand
28 Pages Posted: 16 Mar 2012
Date Written: February 27, 2012
In this paper, we consider Stackelberg games in a multiperiod vertical contracting model with uncertain demand. Demand has a distribution with a mean and variance that depend on the current retail price, and this dependence may vary from period to period. We focus on a class of problems in which the market has a memory-based scaling of demand, and the mean scaling is a function of previous retail prices. This leads to a strategic game in which the parties must balance high immediate profits with reduced future earnings. We propose a complete solution to this multiperiod Stackelberg game, covering cases with finite and infinite horizons. The theory is illustrated by using a Cobb-Douglas demand function with an additive, normally distributed random term, but the theory applies to more general settings.
Keywords: Stackelberg game; multiperiod vertical contracting model; price-dependent demand
JEL Classification: C61, C73, D81
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