Sourcing strategy and competitive pricing with reference price effect

Ningning Wang, Jing Li and Mengying Zhang

Journal of the Operational Research Society, 2025, vol. 76, issue 12, 2567-2578

Abstract: Consumers are inclined to make comparisons among brands. When brands with different popularity outsource to a common contract manufacturer (CM), it is highly prone to triggering consumer comparison behavior which can result in reference price effect. This article investigates how brands optimally choose sourcing strategy and competitive pricing strategy with consumers’ reference price effect. We focus on a supply chain consisting of one CM and two brands. Both brands can choose to insource or outsource to CM which has a cost advantage. Correspondingly, both brands are faced with a competitive pricing problem. We find that (i) if consumer’s acceptance of weak brand and the production cost is high, price competition is the fiercest in situation where both brands outsource to CM; otherwise, price competition is the fiercest in situation where weak brand exclusively outsources to CM. (ii) Either strong brand or weak brand prefers to exclusively outsource to CM while CM prefers the brands to simultaneously outsource. (iii) A strong reference price effect will always hurt strong brand but benefit weak brand no matter what reference price is considered. (iv) CM will be better (worse) off if strong (weak) brand’s retail price is regarded as the reference price.

Date: 2025
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DOI: 10.1080/01605682.2025.2481600

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