Pricing Strategy in Dual-Channel Supply Chains with Loss-Averse Consumers

Chengli Liu (), C. K. M. Lee and K. H. Leung ()
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Chengli Liu: Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, 11 Yuk Choi Road, Hung Hom, Hong Kong
C. K. M. Lee: Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, 11 Yuk Choi Road, Hung Hom, Hong Kong
K. H. Leung: Department of Industrial and Manufacturing Systems Engineering’, The University of Hong Kong, HW 8-23, 8/F, Haking Wong Building, Pokfulam Road, Hong Kong

Asia-Pacific Journal of Operational Research (APJOR), 2019, vol. 36, issue 05, 1-22

Abstract: In this paper, loss-averse consumer behavior during purchase decision-making process in the dual-channel supply chain is modeled. Loss-averse consumers prefer avoiding losses to gain utility with respect to their reference point while purchasing the product. Two product categories are classified: (1) basic product and (2) luxury goods which have lower and higher reference utility to consumers, respectively. The research objective is to determine the optimal price strategy in dual-channel supply chains and discuss the decision behind loss-averse consumers. To model consumers’ valuation of a product, prospect theory is adopted to calculate the demands of each channel. Then, the optimal pricing strategy and the corresponding profits are found out in a Stackelberg game manner. The results encourage manufacturers of basic goods to engage in dual-channel strategy. Effect of “double marginalization” is reduced if consumers are loss-averse in the dual-channel supply chain. Furthermore, the direct channel online contributes larger demand to the manufacturer. However, manufacturers of luxury goods are not suggested for dual-channel strategy because the demand for direct channel online is negligible and the demand for the retail channel remains unchanged. Nevertheless, retailers cannot obtain benefit from dual-channel and as a result, the profit of basic goods retailers will be reduced.

Keywords: Dual-channel; loss aversion; prospect theory; reference point; pricing strategy (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0217595919500271

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