Research On The Pricing Strategy For Supply Chain With Multi-generation Products And Network Externalities

Network externalities exist in many markets, such as telephone, mobile phone, fax, software, telecommunications, aviation, etc., in which product upgrading is frequent due to the development of technology and the increasing competition. The existence of network externality forces the enterprises to consider the mutual influence between the product demands of different generations when pricing the items with different generations. With the development of electronic commerce, more and more companies, such as Lenovo and Haier, adopt dual channels to sell their products, i.e, set up an alternative direct channel in addtiton to the traditional retail distribution channel. Motivated by this background, this paper combines the network externalities to establish the pricing model of a supply chain with dual channels and product upgrading, and focus the effects of network externalities on the equilibrium pricing decisions and profit of the supply chain members.In this paper, we develop dynamic programming and dynamic game models of a supply chain consisting of one manufacturer and one retailer. Based on network externalities, we first build a pricing model of a supply chain with one generation product, and then study the pricing strategy of a supply chain with product upgrading. For these two models, we compare the equilibrium decisions and profits under the single and dual channel mode. Finally, we extend to consider the pricing strategy of a supply chain with strategic consumers. Among these three models, we focus on the effects of the intensity of network externality on the equilibrium decisions and profits of the supply chain and its members. Findings are mainly summarized as follows:(1)Compared to single channel mode, the wholesale price and retail price are both lower under dual channel mode, whereas profits of the manufacturer and supply chain are higher. The manufacturer does not always obtain a higher profit than the retailer. Under certain conditions, the supply chain can gain "pareto improvement" under the dual channel mode.(2) With network externalities, the manufacturer can get actual demand and profits from the direct channel under certain conditions. The effects of network externalities under single and dual channel mode are different. With single channel, the profits of the manufacturer and the retailer are positively correlated to the network externality. With dual channel, when direct channel demand is zero, the retail price is negatively correlated to the network externalities, and profits of the manufacturer and retailer are increasing with the network externality; otherwise when direct channel has actual demand, only the profit of the manufacturer is positively related with network externalities.(3) For the products with two generations, with the increase of network externalities, the retail price and wholesale price for the second generation rises in the second period, but that for the first generation declines in the first period. The profits of the manufacturer and the supply chain increase with the network externalities in both periods.(4)In the presence of strategic consumers, the retail price and wholesale price for the second generation are positively correlated to the network externalities, wheras that for the first generation are negatively correlated to the network externalities, and the profits of the supply chain and its members are positively corelated to the network externalities. When consumers prefer retail channels, the retail price and wholesale price for the second generation are lower in the second period, but that for the first generation are higher in the first period and the profits of the supply chain and its members in the second period and in both periods are lower.The above research provides decision-making reference for the operations and marketing management of the supply chain, e.g., pricing decisions and choice of channels. In addition, we suggest enterprises take measures to strengthen consumers’preference for channels and reduce operations cost.