Price and Service Competition in the Supply Chain with both Pure Play Internet and Strong Bricks-and-Mortar Retailers

Abstract

In the traditional retail industry, some supermarket chains and department stores have been maintaining strongpositions as the market comes to maturity. They can make use of the strong positions to squeeze their suppliers andobtain extra earnings. This situation may be challenged by the rapid development of e-commerce. Consumers’purchase habits have been changing and many manufacturers are starting to sell goods through electronic retailers, inaddition to their traditional distribution channels. This paper analyzes price and service competition in the dualchannelsupply chain with both pure play Internet and strong bricks-and mortar retailers, investigates the influence ofretailer power and proposes some competitive strategies for traditional retailer under e-commerce environment. Thedemand model is proposed based on consumer utility theory, and Stackelberg theory is used to analyze the gameprocess in which the manufacturer is the leader and the two retailers, acting simultaneously, are the followers. Theequilibrium price and service decisions of the supply chain members are reached. The analysis of the competitivestrategy is divided into two parts. Firstly, the influence of the retailer power on members of the supply chain isexamined. We find that although the traditional retailer can use its power to depress the wholesale price, this strategycannot help the traditional retailer increase its profit. Secondly, other competitive strategies of the traditional retailerare analyzed and the traditional retailer is found to be able to improve its operating status through adjusting prices andservices via specific actions.