Retailer Competition

Retailers offer promotion prices in order to differentiate from competition in mass markets and to win the smart customer segments. However, customers respond with high demand volatility in promotions, leaving retailers stocked with a lot of waste in the promotion channel. In this chapter, we shall model an environment in which retailers receive information upstream from the manufacturer composed in the so-called Competition Index, aiming to understand how information sharing increases supply chain efficiency, both in terms of pricing and inventory management. The model combines the retailer’s promotion price with his inventory decision. Hence, pricing is not only adapted to the competitive environment, but also dynamic customer demand in promotions is better matched with supply. The approach is fourfold. First, we provide the setup of the retailer game, by describing the sequence of events, the retailers’ strategies and the resulting customer demand. Second, we enter the two-staged retailer competition game, by solving for the retailer’s optimal order quantity and the equilibrium promotion frequency. Subsequently, we analyze the retailer’s order and frequency decision for two different scenarios: no information sharing and information sharing with the Competition Index. Finally, comparing the two scenarios provides insights into the value of information sharing for customers, retailers and manufacturers. We conclude the chapter with an extension of the results for asymmetric retailers.