Robust Pricing in Marketing Channels

In many cases, managers cannot rely on expected profit maximization to determine prices because of a lack of reliable sales data. To overcome this issue, the pricing literature suggests adopting strategies that are robust to model uncertainty. However, most of this literature addresses situations where firms sell directly to consumers, leaving a gap in understanding how to implement robust pricing strategies when products are sold through retailers. To address this gap, we propose a model that explores the impact of robustness on pricing strategies for both manufacturers and retailers. The model provides three novel insights. First, we find that in equilibrium, channel partners will seek different levels of robustness for their pricing decisions. Second, the model reveals that injecting robustness in channel pricing decisions can not only help manage unforeseeable demand shocks, as it should be, but also mitigate double marginalization. Finally, the model uncovers that a decentralized channel can generate more profit than the centralized channel when robust pricing strategies are implemented.