Pricing and advertising in a supply chain in the presence of strategic consumers

It is well known that strategic consumers can harm firms’ profits by delaying their purchases, to buy at a discounted price. A retailer can induce consumers to purchase at the right price and time by acting on the two components of the consumer’s surplus in each period, that is, the willingness to pay (WTP) and the selling price. We develop a multi-period model to investigate pricing and advertising decisions in a supply chain, in the presence of two types of consumers, namely, myopic and strategic. We assume that the retailer’s advertising positively affects the consumer’s WTP at a decreasing rate over time. The manufacturer sets the wholesale price and its share in the retailer’s advertising cost, while the retailer determines the retail prices during the different periods of the selling season, along with the advertising budget. Our approach makes it possible to determine endogenously the number of price drops during the selling season and the depth of each discount. Assuming decentralized decision-making in the supply chain, we determine the conditions under which the retailer prefers a single-pricing policy to a markdown-pricing policy. We show that the manufacturer has a say in the retailer’s choice through its participation rate in the retailer’s advertising cost. Interestingly, we obtain that an integrated supply chain would, roughly speaking, adopt the same pricing policy as in the decentralized case. To start with, we assume that the WTP is distributed uniformly, and later on, we assess the impact of changing the distribution on the results.