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Wholesale pricing and evolutionary stable strategies of retailers under network externality

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  • Yi, Yuyin
  • Yang, Haishen

Abstract

This study aims to investigate the mechanism of influence between the strategic choice of the marketing objective of retailers and the wholesale pricing of the manufacturer in a market with network externality by developing an evolutionary game model for a one-population of retailers and an optimisation decision model of the wholesale pricing of the manufacturer. Using these models we analyse the influence of network externality on the evolutionary stable strategy (ESS) of the retailers’ marketing objectives, the wholesale pricing of the manufacturer, and the profits of nodal enterprises. The results show that the strength of network externality affects the decisions of the manufacturer with regard to wholesale pricing, thereby influencing the evolution of the marketing objectives of retailers. When the strength of network externality is found to be low, the manufacturer is supposed to set a high wholesale price to prompt retailers to take a profit maximisation strategy (P strategy). When the strength of network externality is moderate, a moderate wholesale price would be set by the manufacturer. Under this condition, the marketing objective of retailers is evolved to stable co-existence of profit, and revenue, maximisation. While when network externality exhibits a high strength, the manufacturer is expected to set a low wholesale price and therefore retailers change the marketing objective to revenue maximisation strategy (R strategy). When the market position of retailers is low, increasing network externality cannot generate more profits. On the contrary, affected by the decisions of the manufacturer with regards to wholesale pricing, retailers lose more profits, while the profit of the manufacturer increases. With the improvement of the bargaining power of retailers, the wholesale price and profit of the manufacturer decrease; however, a large network externality can make up a part of the profit losses of the manufacturer caused by the improved bargaining power of retailers.

Suggested Citation

  • Yi, Yuyin & Yang, Haishen, 2017. "Wholesale pricing and evolutionary stable strategies of retailers under network externality," European Journal of Operational Research, Elsevier, vol. 259(1), pages 37-47.
    • Handle: RePEc:eee:ejores:v:259:y:2017:i:1:p:37-47
    DOI: 10.1016/j.ejor.2016.09.014
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    References listed on IDEAS

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