The impact of consumer behavior on preannounced pricing for a dual‐channel supply chain

• Author: Chao Ma,Ziliang Jin,Juan He,Qian Lei
• Date: 01 November 2020
• Published date: 01 November 2020
• DOI: http://doi.org/10.1111/itor.12786

Intl. Trans. in Op. Res. 27 (2020) 2949–2975

DOI: 10.1111/itor.12786

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

The impact of consumer behavior on preannounced pricing for

a dual-channel supply chain

Qian Leia,JuanHe

a,∗,ChaoMa

band Ziliang Jinc

aSchool of Transportation and Logistics, SouthwestJiaotong University, Chengdu, P.R. China

bSchool of Automotive and TrafficEngineering, Hubei University of Arts and Sciences, Xiangyang, P.R.China

cDepartment of Logistics and Maritime Studies, The Hong Kong Polytechnic University, Hong Kong

E-mail: leiqian900219@163.com [Lei]; hejunlin93@163.com [He]; mmma1123@163.com [Ma];

jzsw1228@gmail.com [Jin]

Received 9 August2018; received in revised form 4 November 2019; accepted 18 February 2020

Abstract

This study discusses a dual-channel supply chain in which a manufacturer sells a regular-priced product

through dual channels in the normal sales period and only sells overstocked products through the direct

channel in the discounted sales period in the presence of strategic consumers. The manufacturer acts as a

Stackelberg leader to adopt a preannounced pricing policy. This study first proposes demand functions for a

two-period dual-channel model by incorporatingconsumer utility functions. Based on the demand functions,

optimal pricing strategies for both manufacturer and retailer are established. The results show that the

manufacturer prefers to raise prices in both periods for consumers with a short delivery lead time. However,

counterintuitively, the selling prices set by the manufacturer do not decrease as the degree of consumer

patience increases. Finally, there is a Pareto zone under a certain condition where both the manufacturer

and the retailer in the two-period dual-channel model outperform their counterparts in terms of profit in the

single-period dual-channel model.

Keywords:dual-channel; strategic consumers; consumer patience; preannounced pricing

1. Introduction

Advancement in sales technology has stimulated manufacturers in various industries (e.g., Apple,

Hewlett-Packard [HP], and Polo Ralph Lauren) to consider selling products to consumers directly

through online platforms(direct channel) in addition to traditional retail channels. The correspond-

ing distribution system of both the retail and direct channels is referred to as dual-channel supply

chain (Li et al., 2016). In a similar vein, demand for products tends to shrink after the new versions

of products are introduced into the market. For instance, the demand for seasonal clothing drops

∗Corresponding author.

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2020 The Authors.

International Transactionsin Operational Research C

2020 International Federation ofOperational Research Societies

Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

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2950 Q. Lei et al. / Intl. Trans.in Op. Res. 27 (2020) 2949–2975

significantly as its new upgrades are continuously launched; furthermore, its average retail price

drops thereafter.In the context of dual-channel supply chain with these consumer demand patterns,

a manufacturer will try to leverage the strength of its online direct channel and at the same time

manage the appropriate relationship with the retailer in the retail channel.

A natural way to cope with these consumer demand patterns is to offer an online promotion or

clearance sales opportunity. The significance of online promotion in certain industries is reflected by

Nielsen’s Holiday Spending Forecast Study indicating that 85% of consumers planned to forgo retail

shopping on Black Friday in 2013. Instead, nearly half of consumers stated that they would shop

online on Cyber Monday. “Cyber Monday sales topped $7.9 billion in 2018 according to Adobe

Analytics Data, making it the single largest shopping day in U.S. history,” said John Copeland,

head of Marketing and Customer Insights at Adobe.1On November 11, 2018 (Alibaba’s Singles

Day), shoppers spent nearly $31 billion online, 27% up from last year,2which demonstrates the

effectiveness of online promotional policies. In such an environment, the product’s selling horizon

in a market is divided into two periods. In the first sales period, regular-priced products are sold in

both the retail channel and direct channel at the same time, whereas overstocked products are sold

only through the direct channel at a low price in the clearance, or second sales period.

Three descriptive factors: degree of consumer patience, acceptance of direct channel, and delivery

lead time are significant in a two-period dual-channel supply chain. First, the degree of consumer

patience is important. Whether consumers purchase during the first or second sales period mainly

depends on the degree of consumer patience.Consumers may wait for the lowest possiblediscounted

price before making a purchase. According to Market Research Society’s survey, more than 50%

of consumers tend to wait for the low-price period to buy products. Second, the acceptance of the

direct channel reflecting consumers’ willingness to purchase online is a key property. When strategic

consumers confront dual channels,consumer acceptance of the direct channel may be less than their

acceptance of conventional retail stores because consumers cannot touch, feel, or see real products

in a direct channel (Evans, 2009). Third, delivery lead time can also affect consumers’ behavior as

delivery lead time is widely recognized as an important measure of the service quality of the direct

channel (Hua et al., 2010). Shang and Liu (2011) emphasize the importance of determining the

right delivery lead time using the industry example of Leather TECH, which gained the competitive

advantage through reducing delivery lead time to two weeks, receiving a positive market response.

Preannounced pricing (also called price commitment) means that the firm may announce the

full price path at the beginning of the selling horizon. Many sellers commit to a preannounced

pricing policy simply to moderate advertising constraints, simplify the administration of pricing,

and prevent ex post price adjustments (Liu and Van Ryzin, 2008). A well-known example of

preannounced pricing policy has been adopted by Lands’ End to sell overstocked products via its

web site. Land’s End launches a new group of products on its “On the Counter” website on each

Saturday. The prices and the future discounts arelisted at the same time, specifically, if the products

are not sold out on Saturday and Sunday, their prices will be reduced by 25%, 50%, and 75% on the

coming Monday, Wednesday, and Friday(https://www.landsend.com/shop/sale/S-0ee?otc=true).

1See more discussions at https://news.adobe.com/press-release/experience-cloud/adobe-analytics-data-shows-cyber-

monday-broke-online-sales-record-79(retrieved February 20, 2019).

2See more discussions at https://www.digitalcommerce360.com/2018/11/12/alibabas-singles-day-shoppers-spent-

nearly-31-billion-online-nov-11/ (retrieved February 20, 2019).

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2020 The Authors.

International Transactionsin Operational Research C

2020 International Federation ofOperational Research Societies