Pricing, Service and Discount Policies for Substitutable Products in a Supply Chain with the Game Theoretical Approach

This paper examines the impacts of three factors include the service, price, and discount on the supply chain’s profit. We consider a supply chain, including one traditional retailer and two manufacturers. By using the game-theoretic approach, we derive optimal solutions and analyze competition between members under two scenarios: (1) the retailer buys the products from two manufacturers without price discount contracts, i.e. no products are sold with price discount contract. (2) The retailer buys the product from one of the manufacturers with price discount contracts. We find that the price discount rate and the service level are very effective on the demand and profit of supply chain members and determining the appropriate discount rate is very important. The results show that increasing the service provided by the retailer does not necessarily increase the profit of the manufacturer and he should set an appropriate discount rate to increase his profit. Our work contributes to three aspects: (1) joint and simultaneous examination of competition in the supply chain under the three factors of price discount, price, and service level; (2) examination of competition in the supply chain where the retailer and a manufacturer provide free service to consumers; and (3) analysis and comparison of the numerical example results in the two above scenarios according to the sensitivity analysis of various parameters.