Optimal pricing decisions for an omni‐channel supply chain with retail service

• Published date: 01 November 2020
• Author: Yuqing Jiang,Andrew Lim,Liping Liu
• DOI: http://doi.org/10.1111/itor.12784
• Date: 01 November 2020

Intl. Trans. in Op. Res. 27 (2020) 2927–2948

DOI: 10.1111/itor.12784

INTERNATIONAL

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IN OPERATIONAL

RESEARCH

Optimal pricing decisions for an omni-channel supply chain

with retail service

Yuqing Jianga, Liping Liub,∗and Andrew Limc

aSchool of Management and Engineering, Nanjing University, Nanjing 210093, China

bSchool of Business, Nanjing Normal University, Nanjing 210023, China

cIndustrial Systems Engineering and Management, National University of Singapore, Singapore 119077

E-mail: jiangyq0906@163.com [Jiang]; lpliu1016@163.com [Liu]; isealim@nus.edu.sg [Lim]

Received 14 July2019; received in revised form 18 January 2020; accepted 17 February 2020

Abstract

Motivated by the emergence of dominant physical stores utilizing a buy-online-and-pickup-in-store (BOPS)

channel, we examine the interaction of such a stronger retailer and a manufacturer’s strategies on the pricing

and service value. The dominant retailer provides an added service value to end consumers by the traditional

channel and BOPS option, which has a positive influence on the marketdemand. The manufacturer makes the

channel selection decision between a dual channel and an omni-channel. We formulate a retailer Stackelberg

game and characterize the equilibrium pricing and service solutions under centralized and decentralized cases.

Our results indicate that the service value of a physical store strongly influences the players’ pricing strategies.

The sensitivity analysis reveals that the total revenue of the supply chain increases with the market scale

expansion coefficient of the BOPS option. Furthermore, the result suggests that offering the BOPS channel

is always an effective initiative to boost supply chain performance, especially in the centralized structure.

Keywords:omni-channel; buy-online-and-pickup-in-store; dominant retailer; service value

1. Introduction

Nowadays, many supply chain members take their online and offline marketing channels as com-

plementary instead of competitive. This reflects a recent rise of omni-channel retailing: a fully

integrated approach to business that combines the worlds of e-commerce and bricks-and-mortar

retailing. In its practical form, consumers might enjoy a seamless experience across online and

offline channels. Among all omni-channel fulfillment operations, allowing consumers to buy online

and pick up in store (BOPS) is viewed as the essential one (Jin et al., 2018). According to Business

Insider Intelligence, as of June 2019, 67% of U.S. consumers have used BOPS in the past six months

and 90% of retailers plan to implement BOPS by 2021. In fact, many retail firms such as Apple,

∗Corresponding author.

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2928 Y. Jiang et al. / Intl. Trans. in Op. Res.27 (2020) 2927–2948

Best Buy, and Walmart are starting up BOPS programs; recent studies of omni-channel highlight

the importance of BOPS option (Gao and Su, 2016).

As demand growsfor in-store pickup, physicalstores play a crucial role in the consumers’ shopping

process, and they remain a critical component of being the pickup points for online orders. The

retailing market today is progressively dominated by premier, centrally managed “power retailers.”

For instance, Gome and Suning emerged as the dominant retailers across the whole of China

since the early 2000s (Shen et al., 2019a). Similarly, the giant electronic retailer, Best Buy, orders

products from upstream suppliers at the wholesale price and then sells them via different channels.

Many retail giants such as Target and Carrefour have sufficient power in developing relations with

consumers (Shen et al., 2019b). In business practice,parallel to increases in market participation and

the increases in retail shares of the individual supply chains, the market power of retailersis steadily

increasing compared to the power of other players of the omni-channel system. The provided

examples illustrate that it is always common for gigantic retailers to possess bargaining power over

both retail price and value-added service. In the context of retail practice, traditional retailers can

satisfy consumers with personalized consumer consultation, provideshoppers the ability to test with

showrooms, as well as other initiatives that could boost sales volume. Empirical research has also

proved thatretail service is an essential factor that impacts consumers’ channel choice, demand, and

loyalty (Li et al., 2018). The service value incurs a substantial operating expense, but the growing

demand may not necessarily benefit the retailer because shoppers mayfind a better deal from online

channel. To tackle this question, we propose a solution to study pricing and service strategies while

the retailer offers service by the traditional and BOPS channels.

We analyze a two-echelon supply chain and mainly focus on the pricing and service value de-

cisions. We assume that the manufacturer sells identical products via a traditional retailer and an

online channel. To improve fulfillment services, the manufacturer and the retailer work together to

implement the BOPS strategy. On the one hand, adding a BOPS channel may bring more addi-

tional purchases for physical stores. On the other hand, the supply chain members suffer from the

increased service cost and the decreased demand of physical store and online channel demand. The

above discussions lead to our research questions: (a) Is it beneficial for the supply chain members

to add a BOPS channel? (b) And if so, how do the players optimally decide price and service value

under the centralized and decentralized case? (c) How does the BOPS strategy affect the interaction

between the dominant retailer and manufacturer?

In this study, we consider a supply chain consisting of a dominant retailer and a manufacturer.

We investigate the aforementioned research questions by considering the following two scenarios:

(a) the centralized scenario, where the supply chain serves as an integrated entity, and the entity

implements dual-channel strategy and omni-channel strategy; (b) the decentralized scenario, in

which the dominant retailer provides the traditional and BOPS channels, and the manufacturer

utilizes the online channel. By comparing the dual-channel and omni-channel decision scenarios,

we find that the maximal supply chain profits in the omni-channel situation are greater than that

in the dual-channel situation, especially in the centralized supply chain. Furthermore, the retail

service value of the physical store strongly influences the players’ pricing strategies. We also explore

the impact of the market scale expansion effect generated by the introduction of BOPS on supply

chain members’ equilibrium decision-making.

The remainder of the paper is organized as follows. The relatedliterature is reviewed in Section 2.

The definition of the problem, assumptions of the model are presented in Section 3. In Section 4,

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2020 The Authors.

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2020 International Federation ofOperational Research Societies