Behaviour-based pricing and wholesaling contracting under supply chain competition

Junbin Wang, Xiaojun Fan and Ting Zhang

Journal of the Operational Research Society, 2021, vol. 72, issue 9, 1943-1959

Abstract: With the accessibility of customers’ purchase history and the development of data analytics, firms that have a better understanding of customer behaviours might charge different prices to their repeat and new customers. This mechanism is referred to as behaviour-based pricing (BBP). We model the competition of two vertically differentiated supply chains to study the strategic interaction between upstream contract choices (long-term or short-term) and downstream pricing mechanisms (BBP or not). We show that manufacturers always prefer long-term wholesale contracts. The adoption of BBP will decrease the profits of both manufacturers and the reseller that sells a low-quality product. However, the reseller that sells a high-quality product can benefit from BBP under certain conditions. Interestingly, when the resellers have the power to determine the type of wholesale contracts, a hybrid configuration where one supply chain uses a long-term contract and the other uses a short-term contract, could occur in equilibrium. Moreover, we find that the customers have a higher surplus under BBP, whereas the short-term wholesale contract can further increase the surplus.

Date: 2021
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DOI: 10.1080/01605682.2020.1750310

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