Cooperative advertising, which usually occurs in a vertical supply chain, is typically a cost sharing and promotion mechanism for the manufacturer to affect retail performance. Research in the literature, however, rarely considers the important phenomenon that advertising has a positive effect on the consumer's reference price. In fact, when a consumer makes a decision to buy a product or not, a reference price is usually in his mind and plays a determinant role. Taking into account the impact of advertising on the reference price, this paper proposes a dynamic cooperative advertising model for a manufacturer-retailer supply chain and analyzes how the reference price effect would influence the decisions of all the channel members. In our model, both the consumer's goodwill and reference price for the product are assumed to be influenced by the advertising and are modeled in differential dynamic equations. In addition, the advertising level, the consumer's goodwill and the reference price are all assumed to have positive effect on sales. Utilizing differential game theory, this paper formulates the optimal decisions of the manufacturer and the retailer in two different game scenarios: Stackelberg game and cooperative game. Also, this paper proposes a new mechanism to coordinate the supply chain in which both the manufacturer and the retailer share each other's advertising costs.

Supply chain coordination through cooperative advertising with reference price effect

Waste stemmed from inappropriate quality control and excessive inventories is a major challenge for perishable food management in grocery retail chains. Improvement of visibility and traceability in food supply chains facilitated by tracking and tracing technologies has great potential to improve operations efficiency. This research aims to reduce food spoilage waste and maximise food retailer's profit through a pricing approach based on dynamically identified food shelf life. The proposed model is evaluated through different pricing policies to exploit the benefits from utilising accurate product shelf life information captured through innovated tracking and monitoring technologies. Numerical analysis is conducted in an illustrative case study.

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A dynamic product quality evaluation based pricing model for perishable food supply chains

Theories of exploratory behavior suggest that inertia and variety-seeking tendencies may coexist within the individual, implying that the same individual may exhibit inertia and variety-seeking at different times depending on his/her choice history. Past research has not allowed for such within-consumer variability in these tendencies. The purpose of this study is to present a choice model that allows us to identify such "hybrid" behavior i.e., a mixture of inertia and variety-seeking, and to distinguish hybrid behavior from simpler types of behavior such as pure inertia, pure variety-seeking and zero-order behavior. The model is estimated at the household level using panel data for three product classes, covering a total of 1069 households. The empirical analysis shows that more than half the households analyzed exhibited hybrid behavior rather than simpler types of behavior.

Modeling inertia and variety-seeking tendencies in brand choice behavior (advertising, brand switching)

We examine the key factors that influence a firm's decision whether to use front-loaded or rear-loaded incentives. When using price packs, direct mail coupons, FSI coupons or peel-off coupons, consumers obtain an immediate benefit upon purchase or afront-loaded incentive. However, when buying products with in-pack coupons or products affiliated with loyalty programs, promotion incentives are obtained on the next purchase occasion or later, i.e., arear-loaded incentive. Our analysis shows that the innate choice process of consumers in a market (variety-seeking or inertia) is an important determinant of the relative impact of front-loaded and rear-loaded promotions. While in both variety-seeking and inertial markets, the sales impact and the sales on discount are higher for front-loaded promotions than for rear-loaded promotions, from a profitability perspective, rear-loaded promotions may be better than front-loaded promotions. We show that in markets with high variety-seeking it is more profitable for a firm to rear-load, and in markets with high inertia it is more profitable to front-load. Model implications are verified using two empirical studies: (a) a longitudinal experiment (simulating markets with variety-seeking consumers and inertial consumers) and (b) market data on promotion usage. The data in both studies are consistent with the model predictions.

The Optimal Choice of Promotional Vehicles: Front-Loaded or Rear-Loaded Incentives?: Front-Loaded or Rear-Loaded Incentives?

This work explores the impact of quick response on supply chain performance for various supply chain structures with strategic customer behavior. By investigating pricing and inventory decisions in decentralized supply chains under revenue-sharing contracts and in centralized supply chains, we study the performance of four various systems and compare the value of quick response in different supply chain structures. The results show that if the extra cost of quick response is relatively low, the value of quick response would be greater in centralized systems than in decentralized systems. On the other hand, if the extra cost is high, decentralized supply chains reap more incremental profits from adopting quick response. We also find that revenue-sharing contracts enable a decentralized supply chain to outperform a centralized supply chain, but only allow limited flexibility of allocating total profits between a manufacturer and a retailer.

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Quick response and supply chain structure with strategic consumers

Customer behavior modeling has gained increasing attention in the context of dynamic pricing. As an important behavior phenomenon, consumer inertia refers to consumers' inherent tendency of purchase procrastination and may induce consumers to wait even when immediate purchase is optimal from an objective perspective. This paper studies a dynamic pricing problem for a monopolist firm selling perishable goods to consumers who may be influenced by inertia. We formulate this problem using the finite-horizon dynamic programming approach and derive the optimal dynamic pricing policy. We demonstrate that consumer inertia produces negative effects on firms' expected revenues and optimal prices, which are monotonically decreasing in both inertia depth and breadth. Through numerical illustrations, we further show that the marginal effects of inertia depth on optimal prices and expected revenues are decreasing, whereas the marginal effects of inertia breadth are increasing. Finally we propose some suggestions for firms to influence the level of consumer inertia.

Li Zhao

Papers

Dynamic pricing in the presence of consumer inertia