Customer-Driven vs. Retailer- Driven
Search:
Channel Performance and Implications
Li Jiang
We
consider a simple supply chain consisting of one manufacturer and two
price-setting retailers. Market demand is downward sloping function of prices
with additive random shock. Retailers purchase products from the manufacturer,
who charges the same wholesale price to both retailers. Retailers then choose
retail price and position stock ex-ante demand realization. Customers first choose a location based on
price and try to satisfy their demand at the chosen (called local) retailer. In
case of a stock-out, a fraction of customers with unmet demand are willing to
have their demand satisfied by excess stock at the other retailer. We label
this phenomenon as search. We posit two models of search driven by customers
and retailers. When search is driven by
retailers, the revenue generated through search is allocated between the two
retailers by a transfer-price mechanism. We provide a comprehensive comparative
study of the two models of search to discuss their impact on the strategic
interaction between the retailers, its effect on the manufacturer and the
customers. We also compare our results to those obtained with exogenously given
retail prices to evaluate the impacts of endogenous pricing on channel
performances.