On pricing and bundling decisions for stackelberg games in parallel channels of substitutable composites

Abstract

The paper describes competition within a supply network with parallel distribution channels. Each supply chain in the network is composed of a manufacturer and a retailer. Manufacturers sell two complementary products to the retailers, who then deliver to the end consumers. All players can bundle or not bundle their products assuming that the retail market presents the products in a mixed bundling setting. The motivation of this study is to mainly analyze the impact of cost reduction via manufacturers, on how the whole supply network will behave. We have modeled and solved partly and fully sequential game structures well known as Bertrand and Stackelberg games, where the preceding movers are considered to have more market power. Mathematical and numerical analyses reveal interesting propositions and managerial insights for decision makers who are practicing cost cutting strategies. The combination of different ordinal structures have led to exact mathematical comparisons among 24 games. Results indicate both manufacturers and retailers are better off with simultaneous pricing games which promotes the concept of coordination through layer and channels of the network. Cost reduction with compensation increases payoffs, if only applied by the manufacturer whose complementary products’ manufacturing costs are more distanced. It is also shown that retailers enjoy a retail advantage on one product at its best when playing retailer leading Stackelberg games.