TY - JOUR
T1 - How to set price and quality in a supply chain of virtual products under bi-criteria and risk consideration
AU - Chernonog, Tatyana
AU - Avinadav, Tal
AU - Ben-Zvi, Tal
N1 - Publisher Copyright:
© 2017 Elsevier B.V.
PY - 2019/3
Y1 - 2019/3
N2 - Virtual products are characterized by ample production capacity, zero lead time, and no holding costs. We consider a two-echelon supply chain of a virtual product, consisting of a single manufacturer and a single retailer who face random demand. Demand depends on both price and quality of the product, and its stochastic nature exposes the supply-chain members to financial risk. Each party adopts profit criteria that reflect his or her attitude toward this risk, including the use of bi-criteria. By formulating a model that follows a Stackelberg game and using the stochastic dominance property, we show that one can analytically obtain equilibrium by assuming certain common structures of the demand function and of the risk attitudes. The contribution of this study is fourfold: (i) analyzing multiplicative and additive demand forms and comparing the properties of the decisions under the two forms; (ii) showing that under the multiplicative demand form, the pricing strategies are not affected by the parties' attitudes toward risk, whereas the manufacturer's decision on quality-investment is affected by his risk attitude; (iii) showing that under the additive demand form, the manufacturer's utility function and the demand uncertainty affect pricing and investment strategies; and (iv) suggesting a method to construct the efficient set of decisions and the non-dominated set of profit criterion values.
AB - Virtual products are characterized by ample production capacity, zero lead time, and no holding costs. We consider a two-echelon supply chain of a virtual product, consisting of a single manufacturer and a single retailer who face random demand. Demand depends on both price and quality of the product, and its stochastic nature exposes the supply-chain members to financial risk. Each party adopts profit criteria that reflect his or her attitude toward this risk, including the use of bi-criteria. By formulating a model that follows a Stackelberg game and using the stochastic dominance property, we show that one can analytically obtain equilibrium by assuming certain common structures of the demand function and of the risk attitudes. The contribution of this study is fourfold: (i) analyzing multiplicative and additive demand forms and comparing the properties of the decisions under the two forms; (ii) showing that under the multiplicative demand form, the pricing strategies are not affected by the parties' attitudes toward risk, whereas the manufacturer's decision on quality-investment is affected by his risk attitude; (iii) showing that under the additive demand form, the manufacturer's utility function and the demand uncertainty affect pricing and investment strategies; and (iv) suggesting a method to construct the efficient set of decisions and the non-dominated set of profit criterion values.
KW - Bi-criteria
KW - Game theory
KW - Quality investment
KW - Risk
KW - Supply-chain management
KW - Virtual products
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U2 - 10.1016/j.ijpe.2017.10.020
DO - 10.1016/j.ijpe.2017.10.020
M3 - Article
AN - SCOPUS:85033474720
SN - 0925-5273
VL - 209
SP - 156
EP - 163
JO - International Journal of Production Economics
JF - International Journal of Production Economics
ER -