Myopic vs. far-sighted behaviours in a revenue-sharing supply chain with reference quality effects

Abstract

In this paper, we consider a dynamic supply chain where a manufacturer produces and distributes a featured product through an exclusive retailer to end consumers. The manufacturer decides the product quality and wholesale price, while the retailer sets the retail price in the presence of a revenue-sharing contract and consumers’ reference quality effects. The objective of this study is to investigate the impacts of myopic behaviour regarding the reference quality on the product quality and pricing strategies and profits of both members. Our results suggest that the manufacturer’s myopia leads to a higher quality, higher price strategy and a higher quality–price ratio which benefits consumers. Meanwhile, relative to the far-sighted behaviour, myopia results in a more quality-sensitive but less price-sensitive market demand. What’s more, we find that the manufacturer is apt to act in a far-sighted way, but the retailer isn’t always willing to cooperate with a far-sighted manufacturer. Taking myopic strategies for both members is likely to gain a high profit of the whole supply chain for a relatively high marginal contribution of product quality on demand and a relatively low revenue-sharing proportion.

Keywords:

• pricing
• quality
• myopia
• reference quality
• revenue-sharing contract
• differential games

Notes

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by National Natural Foundation of China [No. 61473204]; Humanity and Social Science Youth Foundation of Ministry of Education of China [No. 14YJCZH204]; the Program for New Century Excellent Talents in Universities of China [No. NCET-11-0377].